IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2014-404-2136
[2015] NZHC 2559
UNDER
the Receiverships Act 1993
BETWEEN
TORCHLIGHT FUND NO.1 LP (IN
RECEIVERSHIP)
Plaintiff
AND
KARE JOHNSTONE, WILLIAM GUY
BLACK AND JASON PRESTON
First Defendants
WILACI PTY. LIMITED
Second Defendant
NZ CREDIT FUND (GP) 1 LIMITED
Counterclaim Defendant
Hearing:
24-28, and 31 August 2015
Further memoranda received 7 September 2015
Appearances:
R B Stewart QC, S M Hunter and A Ho for the Plaintiff and
Counterclaim Defendant
N S Gedye QC M W McCarthy for the Second Defendant.
Judgment:
19 October 2015
RESERVED JUDGMENT OF MUIR J
This judgment was delivered by me on Monday 19 October 2015 at 4.30 pm
pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Counsel/Solicitors:
R B Stewart QC, Barrister, Auckland
S M Hunter, Gilbert Walker, Auckland
A Ho, Gilbert Walker, Auckland
N S Gedye QC, Barrister, Auckland
M W McCarthy, Lowndes Associates, Auckland
TORCHLIGHT FUND NO.1 LP (IN RECEIVERSHIP) v JOHNSTONE & ORS [2015] NZHC 2559 [19
October 2015]
CONTENTS
Paragraph
Introduction
1
Background
5
The Loan Agreement
55
Subsequent events
58
Receivership
63
The Law
66
Introduction
Applicable rules of precedent
Issues
The first issue
The second issue
Dunlop
Paciocco
Yarra
Greatest loss conceivably proved or greatest
loss likely?
The role of oppression within the doctrine
Admissible evidence
66
70
76
77
81
84
86
92
96
102
107
The MGM issue
119
Penal or compensatory?
135
Plaintiff’s submissions
Defendant’s submissions
Analysis
136
149
166
Liability of limited partner
194
Claim for Credit Suisse cost of funds in addition to
default interest
195
Claim for receivers’ costs and disbursements
198
Do clauses 7 and 11 include receivers’ costs?
Does the Court have jurisdiction to review
receivers’ cost?
205
207
Relief
219
Costs
222
Introduction
[1]
This is a case primarily concerned with the law relating to penalties. It arises
out of a short term loan of AUD 37m by interests associated with a high net worth
Australian individual to a New Zealand based private equity fund with urgent cash
requirements. That loan has since been repaid. But delays in doing so and an AUD
500,000 per week “Late Payment fee” have resulted in an alleged liability to the
lender in excess of AUD 30m. In addition, the lender claims its own cost of funds
(having secured back to back funding from Credit Suisse), interest as stipulated in
the Loan Agreement and in excess of NZD 1m for receivers’ costs and
disbursements.
The borrower seeks a declaration that the Late Payment fee
comprises an unenforceable and irrecoverable penalty.
[2]
Shortly before trial, additional claims by the borrower that the lender acted
unconscionably in breach of s 12CB of the Australian Securities and Investment
Commission Act 2001 (Commonwealth) (the ASIC Act) by imposing an AUD 5m
facility fee for the transaction, were abandoned. The borrower admits liability for
that fee and interest on all outstanding sums from time to time under the Loan
Agreement.
[3]
Throughout this judgment I will refer to the plaintiff borrower as Torchlight
and the second defendant lender as Wilaci.
[4]
An added complexity to the case is that the relevant law (except as otherwise
agreed by the parties) is that of New South Wales (NSW) in respect of which
extensive expert evidence was called.
Background
[5]
This is explained in some detail because of the importance of all of the
circumstances under the relevant Australian authorities.
[6]
Torchlight is a private equity fund which was established in 2009 to invest in
distressed assets. It is no longer active having transferred those assets to a Cayman
Islands’ entity.
[7]
The counterclaim defendant is the general partner of Torchlight and as such is
jointly and severally liable for the unpaid liabilities of Torchlight pursuant to s 26 of
the Limited Partnerships Act 2008. Mr George Kerr, who was Torchlight’s principal
witness of fact, is a director of the general partner. At the time his interests were also
majority shareholders in Pyne Gould Corporation (PGC).
[8]
In mid-2012 Torchlight was in what Mr Kerr described as a “very tight
liquidity situation”. One of its investments involved the purchase of debt owed by
RCL Group (an Australian Real Estate Company) to Bank of Scotland International
(BOSI). The purchase price was approximately AUD 185m, of which Torchlight had
paid all but AUD 37m by mid-2012. The balance was due on 17 August 2012. This
in itself involved an extension from the agreed contractual repayment date of 23 July
2012.
[9]
By mid-2012 BOSI was in the final stages of exiting its investments in
Australasia following difficulties which it had itself encountered arising out of the
Global Financial Crisis (GFC). The Torchlight receivable was one of the last assets
to be realised. Mr Kerr anticipated that, in the absence of repayment by due date,
BOSI was likely to take prompt enforcement action. Torchlight did not have the
cash available to make the required payment.
Mr Kerr’s evidence was that it
planned a capital raising but required short term bridging finance to get it through.
Unacknowledged by Mr Kerr at the time was the impact a recent and high profile
dispute involving the Financial Markets Authority (FMA) had had on his ability to
recapitalise Torchlight. In the final analysis no such capital raising was undertaken
before it became inactive.
[10]
To meet Torchlight’s liquidity requirements Mr Kerr turned to Mr Andrew
Skidmore, a financial investment consultant, now based in Singapore but formerly
employed by Macquarie Bank in Sydney. Mr Kerr and Mr Skidmore had been
acquainted since approximately 2010 and Mr Skidmore says they developed a good
working relationship over several different projects. The two knew each other well,
to the extent that in 2012 Mr Kerr made an AUD 50,000 advance to Mr Skidmore
(from the so-called Torchlight No 2 Fund) to assist him with temporary liquidity
requirements. Arrangements were made by Mr Skidmore to bill Torchlight (GP (2)
Limited) in that amount for advisory services which Mr Skidmore says he provided.
Mr Skidmore also says that around this time he was invited by Mr Kerr to become a
director of a limited partnership called White LP but this did not eventuate.
[11]
Mr Kerr was aware that Mr Skidmore had previously sourced what was
initially a NZD 20m loan from interests associated with Mr J M Grill, a wealthy
Australian engineer, businessman and founder of the publicly listed WorleyParsons
Limited. This had been to a New Zealand farmer named Alan Pye who needed
finance to assist with his shareholding arrangements in Dairy Holdings Limited
(DHL). Mr Skidmore had been involved in introducing these loans to Mr Grill and
Wilaci, the corporate trustee of Mr Grill’s Serpentine Trust.
[12]
Mr Skidmore’s evidence was that the first he heard of Mr Kerr’s requirements
was by way of a text received when he was in Los Angeles en route back to
Australia. He says that he and Mr Kerr frequently communicated by text and that
the message sought assistance in promptly raising money, with an inquiry whether
this “is one for Mr Grill” or words to that effect.
[13]
The parties met shortly afterwards in Sydney with Mr Kerr’s financial
advisor Mr Naylor also present.
[14]
There is a conflict in the evidence between Mr Kerr and Mr Skidmore as to
whether, at this first meeting, Mr Kerr identified that Torchlight’s cash requirements
were to meet its commitments to BOSI. Mr Skidmore says that the explanation Mr
Kerr gave was that he wanted to re-domicile the Torchlight fund from New Zealand
to Australia and that he needed third party finance to achieve this. He says Mr Kerr
stated that the banks would not provide the funding necessary and that his
requirement was for a short term facility only. He also says that Mr Kerr spoke of
wanting to buy all of the PGC shares which he did not already own and that he
planned to de-list PGC and privatise it as part of a plan to quit New Zealand entirely.
This was explained as related to the recent difficulties which PGC’s subsidiary
Perpetual Trust had had with the FMA.
[15]
Mr Kerr says that he told Mr Skidmore at the outset that the AUD 37m was
required to repay BOSI. I prefer the evidence of Mr Skidmore in this respect. It is
consistent with the stated reason for the loan referred to in Mr Skidmore’s first
communications with Mr Grill (where Mr Skidmore refers to an investment
company “domiciling out of New Zealand” for which he has been asked to execute a
strategy), and, in my assessment, Mr Kerr was at this early stage playing his cards as
close to his chest as possible to protect his negotiating position. To accept Mr Kerr’s
evidence would mean that he and Mr Skidmore then deliberately colluded in a false
explanation of why the funding was required to Mr Grill. Given the nature of Mr
Skidmore’s relationship with Mr Grill I am not prepared to find that.
[16]
Mr Skidmore deposes that there was some discussion at the meeting about
the amount of money required, with Mr Kerr initially stating that he needed AUD
24-26m, and Mr Skidmore advising he should seek the maximum sum possibly
needed as it was always undesirable to go back and ask for more. It was agreed that
AUD 37m should be sought and Mr Skidmore says that his brief was to find a
solution and negotiate the terms of a finance facility.
[17]
From the outset Mr Skidmore identified Mr Grill as the preferred lender. He
saw the proposition as well outside financing and banking norms and that the
prospects of success probably lay only with persuading a wealthy individual like Mr
Grill to become involved.
[18]
Mr Skidmore’s first communication with Mr Grill was by email on Monday
13 August 2012. The subject line was “Small albeit juicy transaction”. He said,
consistent with my finding in [15] above, that the deal “is a straight facilitation of a
re-domiciling of a company from New Zealand to Australia”. The amount of the
loan was specified as AUD 37m, the term as between 21 and 60 days and the coupon
rate 18 per cent per annum “with a minimum return to JMG of $1m irrespective of
whether or not the time period is less than 60 days”. Collateral was stated to be a
multiple of the AUD 37m advance “to be discussed”. The email contemplated that
the advance would, in turn, be sourced from borrowings which Mr Grill could secure
against WorleyParsons Limited shares. He inquired whether Mr Grill was around the
following day.
[19]
Mr Grill responded later on 13 August suggesting Wednesday 15 August 9.30
am at his office. That meeting duly took place and, later that day, Mr Skidmore
followed up with an email suggesting that he had a “solution that guarantees $37m to
be called in 59 days and payable on the 60th day”, with an “18 per cent pro rata
coupon paid up front for the 60 day period”. A second meeting was proposed at
10.00 am the next morning which occurred. Later on 16 August Mr Skidmore
emailed Mr Grill detailing what he described as his “foolproof structure” to facilitate
what he described as “the re-domiciling and roll up of the Torchlight Fund No 1
Limited Partnership to the Torchlight Fund No 2 Limited Partnership”. He identified
collateral which he said had a value of circa NZD 180m, said that, with the redomiciling, Mr Grill’s security would transfer to the Torchlight Fund No 2 LP and
that such fund had committed but not called contributions of AUD 150m “which you
will have an automatic call upon on Day 59”.
[20]
The email contains two references to Credit Suisse consistent with the
understanding that it would be the ultimate source of Wilaci’s funding for the
transaction. Again the email proposed a meeting earlier the following day.
[21]
Nine minutes later Mr Skidmore followed that email up with another to Mr
Grill confirming the coupon rate of 18 per cent per annum “on a pro rata basis for the
60 day term with a minimum coupon in dollar terms of $1m AUD”. He also
confirmed that the cost of funds provided by Credit Suisse would in turn be paid by
Torchlight. Again the email emphasised repayment on the 60th day. The facility
would be “paid out and extinguished” at that time. A little over an hour later Mr
Skidmore sent a further email identifying an additional advantage of the transaction
in terms that “Torchlight will not compete with you for any additional DHL shares”
giving Mr Grill the ability to take control of DHL at a “discounted value”. In his
evidence Mr Grill said that none of this was of any interest to him given limitations
on his ability to hold shares in DHL absent Overseas Investment Commission (OIC)
approval.
[22]
Mr Skidmore’s evidence was that, as at the evening of Thursday 16 August,
Mr Grill had not shown any enthusiasm for the transaction and, indeed, had made it
clear that he would not be interested in it at a proposed return of AUD 1m for 60
days.
[23]
The next morning, on 17 August, at 7.08 am, Mr Skidmore again emailed Mr
Grill. The terms of the email are significant and are set out in full below.
John,
The last condition on any advance to Torchlight Funds would include an
immediate dollars $1m AUD penalty plus any additional interest charges
from the Credit Suisse facility in the event that the CS facility is not
extinguished on Day 60. For completeness, a further penalty of AUD 1m
would be payable each month (to be calculated on a pro rata basis) that for
any reason Torchlight Funds were unable to complete the settlement within
the specified 60 day term.
This I believe to be foolproof.
[24]
The reference to “foolproof” in this context mirrored earlier references in the
same terms and, in my view, was directed to assuring Mr Grill (or as Mr Skidmore
said on 15 August “guaranteeing”) that repayment would be made on the 60 th day, by
virtue of a substantial “penalty” if default occurred.
[25]
There was significant conflict in the evidence between Mr Kerr and Mr
Skidmore as to whether this email was sent on the instructions of Mr Kerr. Mr
Skidmore’s evidence was that, because the proposal was not gaining any immediate
traction, he was authorised by Mr Kerr to offer this term as a “sweetner” to
encourage Mr Grill to proceed. Mr Kerr was adamant that he had given no such
instructions and in closing submissions Mr Stewart QC relied heavily on the fact that
at 8.40 am the same day Torchlight’s solicitor, Mr Michael Tinkler, circulated a draft
Loan Agreement and General Security Deed1 to Mr Kerr, which Mr Kerr in turn
approved to be sent to Mr Skidmore, and which contained no reference to late
payment fees. Torchlight submitted that this was inconsistent with any instruction
on Mr Kerr’s part to offer a penalty payment as at 7.08 am that day.
[26]
I cannot accept Mr Kerr’s evidence in this respect. Not only would it be quite
extraordinary for Mr Skidmore to have proposed such substantial penalty payments
1
I will refer to this elsewhere in the judgment by the popular acronym “GSA”.
without instruction, but it is inconsistent with an email sent from Mr Kerr to Mr Grill
on 26 October 2012 (the date of the repayment), in terms:
One issue that concerned me from a discussion with Andrew [Skidmore] last
night was that we have always stated this was a fund launch and requested
and received the right to pay a late payment fee to ensure flexibility on term
date – albeit at $500k a week.
(emphasis added)
[27]
At 9.28 am on 17 August Mr Grill responded to Mr Skidmore in terms that he
“continue[d] to be concerned about doing this deal” and advising that he was having
a significant skin cancer operation that day. Mr Skidmore responded at 10.03 am in
terms that he was “100% confident in the fact that you will exit this in 60 days time”,
that it would net Mr Grill AUD 1m over 60 days in an otherwise “benign market”
and that, not only was the security cover four times the advance, but that it would
“pave the way for a significant ultimate controlling stake in DHL in the short term”.
The email again referred to re-domiciling However, by 12.09 pm that day Mr Kerr
had emailed Mr Skidmore with Torchlight’s BOSI account details indicating that, at
least by that stage, Mr Skidmore was probably aware of why the money was actually
required.
[28]
At this point there was something of a disconnection between the actions of
Mr Kerr and the stage at which negotiations had reached between Mr Skidmore and
Mr Grill. Mr Grill was still far from enthusiastic about the transaction but Mr Kerr’s
actions in providing BOSI account details ostensibly indicated preparations for
imminent settlement.
Mr Skidmore’s evidence was that Torchlight was simply
getting ahead of itself and that Mr Kerr could have had no realistic belief that a loan
of this type and magnitude could be sourced and paid out within a matter of a few
days. He emphasised that Mr Grill had not even met Mr Kerr at this stage nor had
any due diligence been conducted. It is ultimately unnecessary for me to decide the
reason for this mismatch in expectations. I accept an understandable desire on the
part of Torchlight to get “ahead of the curve” as much as possible with regard to
documenting the transaction, in order to minimise any delays in repayment of BOSI.
The due date for that repayment had already arrived.
[29]
In any event, Mr Skidmore did not provide the draft loan documents to Mr
Grill. Mr Grill had not agreed to proceed on any terms at that stage, had already
made it clear he would not be interested in a return of only AUD 1m and provision of
draft documents would, in that context, Mr Skidmore said, have been counterproductive.
[30]
On 17 August at 2.17 pm Mr Skidmore responded to Mr Kerr’s provision of
BOSI account details with an email in unusual terms stating:
Confirming all is in order other than the final signature of JMG.
Unfortunately JMG has gone into urgent surgery today. He will therefore
not be in a position to authorise the transfer today.
I anticipate that I will see him tonight or over the weekend and the transfer
will proceed by COB Monday.
Apologies for the delay.
[31]
In evidence Mr Skidmore described this as a “Dorothy Dixer”. 2 He says that
he provided the email to Mr Kerr at his specific request so that Mr Kerr could
placate BOSI, something which in hindsight he now regreted. That suggestion gains
credibility from the fact that approximately an hour later Mr Kerr forwarded Mr
Skidmore’s email to Arnold Bloch Lieber, the solicitors acting for BOSI. Forty
minutes later Mr Kerr also forwarded it to his personal contact in BOSI Mr Larry
Mahaffy.
[32]
At about the same time, Mr Grill approached Credit Suisse to see whether it
would lend Wilaci the AUD 37m required. Mr Grill stated that, although it was far
from clear to him at that stage whether the transaction would proceed, he wanted to
make a precautionary application as there was no point in discussing matters further
if the bank would not lend that sum. The result was a loan offer dated 20 August
2012 from Credit Suisse for a maximum amount of AUD 40m secured by a
maximum number of 3,500,000 WorleyParsons shares (having a value of
approximately AUD 90m at that time).
2
A reference to the American advice columnist Dorothy Dix who reputedly made up her own
questions to allow her to publish more interesting answers.
[33]
On Monday 20 August at 1 pm Mr Kerr and Mr Skidmore met with Mr Grill.
Mr Grill described it as a high level meeting at which he made it clear he would only
be interested in the transaction if it “made sense for Wilaci”, that is, if the return
reflected the risk. He stated that Mr Kerr was cool and apparently relaxed and made
no mention of urgency or the need to repay BOSI. Although I accept that Mr Kerr
would have sought to maintain a relaxed demeanour, my assessment is that by this
stage the fact that a loan repayment formed some part of the elaborate structures he
was proposing was, in fact, information communicated to Mr Grill. Only on that
basis is the email referred to in my next paragraph explicable. However, having
heard Mr Kerr give evidence I have no doubt that Mr Skidmore was correct in saying
that there were “several strands to his business strategy underlying the need for
$37m finance” and that Mr Kerr was anxious to place the repayment in a wider and
positive context.
[34]
At 3.51 pm the same day Mr Kerr provided Mr Skidmore with what he
identified as a “proposal with teeth”. This was an obvious response to Mr Grill’s
request that he be offered a deal which reflected the risk.
The email was
immediately forwarded by Mr Skidmore to Mr Grill. In it Mr Kerr proposed that, in
exchange for the funding, he would procure the option of Mr Grill either:
(i)
selling what was by then Wilaci’s AUD 27m Pye DHL loan to PGC
for cash; or
(ii)
exchanging the loan for a cornerstone interest in PGC following
privatisation.
The email identified the true purpose of the loan in terms:
As you know the Torchlight RCL loan is a catalyst for this – and it is very
important to me personally to close up.
Hence all my cards are laid out in front of you.
[35]
There followed a number of emails between Mr Skidmore and Mr Grill, Mr
Kerr and Mr Grill, and Mr Kerr and Mr Skidmore relating to a possible PGC
investment, culminating in an email from Mr Kerr to Mr Grill at 4.36 pm on Tuesday
21 August in which Mr Kerr proposed a privatisation of PGC, “indirectly financed
by yourself” which he suggested would result in an uplift in value of $10m which he
proposed be split between them, “so circa 5m each”. He suggested that “The timing
of the 5m will be parri passu in timing within 14 days closing of PGC privatisation”.
[36]
In his evidence Mr Grill stated that, although he explored this proposal
further, he had “no real appetite for it”. That does not sit comfortably with his email
of 21 August 2012 to Mr Skidmore which suggests that he would “contemplate an
arrangement” which, from the terms of the email, appeared to envisage an
investment in PGC.
[37]
On receipt of Mr Kerr’s proposal, Mr Grill says that he “took it … that the
return on the investment of $1m originally offered was now being proposed at $5m”
and that it was “not clear to me from this email that Mr Kerr was proposing only an
equity investment in PGC as Mr Kerr now contends”. I consider it reasonably
obvious that what was proposed at that stage was an equity investment and in his
brief of evidence Mr Grill fairly conceded that “by this stage some level of confusion
has (sic) arisen in relation to the whole question of PGC Investment”.
[38]
Mr Kerr’s email was immediately followed by one from Mr Skidmore to Mr
Grill (at 4.47 pm), in terms:
John,
This is as good as I can do.
You now make $5m as opposed to $1m…
[39]
At this point Mr Grill appears to have decided that the fundamentals of the
transaction were acceptable, albeit that what he contemplated was a loan to
Torchlight and not an investment in PGC. Whether he chose to “cherry pick” Mr
Kerr’s offer is, it seems to me, ultimately immaterial although I am inclined to the
view that he did. In any event, I find that he was never minded to enter into the
transaction for an AUD 1m fee and only at the level of AUD 5m was his appetite for
the transaction sufficiently whetted.
[40]
Mr Skidmore’s evidence was that later on 21 August he phoned Mr Grill who
said that he was only interested in a straightforward loan to Torchlight and neither
wanted a shareholding in PGC nor any other complex arrangements. However, he
did indicate that a fee of AUD 5m for a 60 day advance would be acceptable to him.
Mr Skidmore then confirmed this by phone to Mr Kerr who agreed to proceed on
that basis.
[41]
Torchlight’s solicitor Mr Naylor then prepared loan and general security
agreements which were executed by Torchlight and forwarded to Mr Grill at 10.50
am on 22 August. Schedule 1 to the Loan Agreement provided for an advance date
of 22 August, a term of 60 days, a fixed interest rate of 5.25 per cent, a default rate of
5 per cent “above the then current interest rate” and a fee of AUD 5 million payable
120 days following the date of the advance. The fixed rate interest for the period of
the advance, calculated in the amount of AUD 320,000, was payable on the Date of
Final Payment being 60 days after the Date of Advance.
[42]
At 11.57 Mr Grill emailed his solicitor Mr Shihadie, Mr Skidmore and Mr
Kerr saying that he would be engaging the services of Mr Kurt Jeston to undertake
due diligence on the transaction. This was not a welcome development from Mr
Kerr’s perspective in that it meant inevitable further delay in circumstances where
Torchlight was incurring substantial penalty interest to BOSI. It cannot, however,
have been unexpected.
[43]
Mr Skidmore endeavoured to accelerate the process by emailing Mr Grill and
stating that he had “inadvertently set an expectation in the mind of George Kerr that
due diligence on the deal would be completed today given that the structure is now
relatively straight forward”. He also sent a further email to Mr Kerr, again in what
he described as Dorothy Dixer terms, for the purposes of placating BOSI. Given that
Mr Grill had only just appointed Mr Jeston to conduct due diligence, the email gave
an impression of a transaction significantly more advanced than was actually the
case.
[44]
Mr Skidmore’s email to Mr Kerr at 6.22 pm on 22 August is revealing in
terms of how the transaction was at that stage tracking. It notes a discussion that Mr
Skidmore had just had with Mr Grill and that Mr Grill felt he was being pushed into
the transaction, that in Mr Grill’s words “no-one in the world would expect AUD
37m without proper due diligence” and that he would not be “rushed for someone
else’s timetable”. The email stated:
He [Mr Grill] simply was not a buyer of an increased fee for the advance
being expedited. Rather, his (rather strident) view is that it was not until last
night that he was presented an equitable arrangement that was palatable”.
[45]
Shortly afterwards, a detailed email arrived from Mr Jeston setting out 15 due
diligence inquiries. Mr Skidmore’s evidence was that this provoked a somewhat
explosive reaction from Mr Kerr (at whose offices he was working when the email
arrived) and that there was initially talk of approaching other lenders. However, Mr
Kerr later confirmed to Mr Skidmore that Wilaci remained his preferred lender and
immediate efforts were then made to satisfy the due diligence inquiries.
[46]
At 7.25 am on 23 August 2012 Mr Skidmore reported to Mr Grill that “all
expectations are now in check”.
[47]
Mr Grill, who had been out of Sydney, returned on the evening of Thursday
23 August. Mr Jeston reported the following day stating that he had been working
through the assets and getting comfortable that they provided sufficient collateral
and that he was also comfortable with cash flows from the RCL debt (which had
been identified as one of the sources of repayment in Mr Kerr’s email to Mr Grill of
21 August at 4.36 pm). Mr Jeston then inquired whether Mr Grill was “expecting a
5.25% interest rate plus $5m fee plus a cost recovery which includes the Credit
Suisse loan costs?”
[48]
Mr Grill’s response3 is significant in that it raised again the subject of the
“penalty” Mr Skidmore had proposed in his email the previous Friday.
The
response was in terms:
I am expecting to recover all my costs of going into the transaction which
include legal, financial advice etc, loan set up costs (if any), interest cost on
3
Mr Jeston’s email is noted as having been sent at 1.47 pm and Mr Grill’s response at 11.56 am.
The discrepancy is unexplained but presumably relates to the time settings on one or other
computer. The parties agreed that Mr Grill’s email of 11.56 am was a response to Mr Jeston’s
“feedback request”.
the $37m (at approx 5.25%) plus $5 million providing loan is settled in 60
days. Additional $1 million for week or part thereof after 60 days.
[49]
Mr Grill’s requirements in relation to the late payment sum were
communicated to Mr Kerr and Mr Skidmore says he was told to try to negotiate the
figure down. At 6.50 pm on Friday 24 August Mr Skidmore emailed Mr Grill
proposing that what he termed the “$1m per week penalty interest” be reduced to
AUD 100,000 per week. The email contains a reference to the “aim” of the payment
being to “incentivise settlement” and to the suggested AUD 100,000 per week being
“a very significant incentive when viewed in the overall context of the total coupon
payment for the 60 day period is (sic) $5m”.
[50]
Mr Skidmore’s proposals had an element of optimism given the earlier offer
by him at the level of AUD 1m per month.4 However, undeterred, he sent an email
10 minutes later describing AUD 100,000 per week as being “more than double the
penalty of 500 bps over the bank bill rate that is currently proposed in the Loan
Agreement” and, although “totally justified”, also “fair and reasonable”.
[51]
Mr Grill responded at 12.55 pm on Saturday 25 August in terms which
featured prominently in Torchlight’s case. He stated:
I didn’t ever agree to the 500 bps over the bill rate in the loan agreement. It
has never been discussed.
I am concerned that $100k per week doesn’t provide enough incentive to
make sure the deal gets settled within 60 days. That’s why I have suggested
$1 million. A compromise of say $500k would be okay to me.
[52]
Mr Skidmore forwarded that email to Mr Kerr’s financial advisor, Mr Naylor,
who responded to Mr Kerr in terms:
Starting to get ridiculous.
Do we have any viable alternative or are we a price-taker?
[53]
The suggestion that Torchlight was at that stage a “price-taker” was accurate.
Repayment to BOSI was now significantly overdue. Substantial penalties were
being incurred. There was no viable funding alternative within available timeframes.
4
Albeit in the context of much lower facility fee.
Mr Skidmore was accordingly instructed to accept Mr Grill’s “compromise” which
he did by email timed 1.32 pm and in terms:
Thought you would say that!
Done.
Russell,
Please have Michael Tinkler adjust the loan agreement to reflect this and
send to Michael Shehadie.
George, [Kerr]
A bottle of wine to Rush St, Woollahra!
[54]
The revised transaction documents were duly prepared and executed by the
parties on Monday 27 August 2012, although dated 22 August 2012. Arrangements
were simultaneously made for transfer of the AUD 37m from Credit Suisse to BOSI.
At the same time Torchlight executed the GSA.
The Loan Agreement
[55]
This defined the loan terms as those set out in Schedule 1. They are repeated
in full below.
Schedule 1: Loan Terms
(i)
Loan:
AUD$37,000,000
(ii)
Date of Advance:
The 22nd day of August 2012
(iii)
Term:
60 days
(iv)
(a) Interest Rate: (per cent per annum)
The Credit Suisse cost of funds plus a margin of
150 basis points on a pass through basis from the
Lender to the Borrower
(b) Default Rate: (per cent per annum)
0.00% above the then current Interest Rate
(c) Late Payment fee: (per week)
$500,000, which amount will reduce on a pro
rata basis by the equivalent percentage reduction
that occurs on any principal repayment of the
Loan being made
(v)
Borrower’s Payments:
(a) Fee
(vi)
AUD$5,000,000 payable 120 days following the
Date of Advance.
(b) Payment of Interest
An amount of $320,000 being the interest
payable on the Loan during the term of the Loan
shall be paid on the Date of Final Payment (being
60 days following the Date of Advance)
(c) Term Payments
No payments during the term one final payment
on the Date of Final Payment of principal,
interest and fees (to the extent no paid).
(d) Number of Term Payments
Nil.
(e) Date of Final Payment
60 days after the Date of Advance
Securities:
General Security Deed over all of the assets and undertaking of the Borrower.
(vii)
Credit Contracts Act:
All the terms of the Credit Contract are obtained in this Agreement and the Securities. The
following information is required to be disclosed by the Credit Contracts Act 1981.
(a) Cost of Credit:
Establishment Fee
Interest
Other Costs (excluding interest)
Total Cost of Credit
(b) Amount of Credit:
The Loan
Establishment Fee
Other Costs (excluding interest)
Amount of Credit
(ix)(Sic)
$ 5,000,000
$ 320,000
Nil
$ 5,320,000
$37,000,000
$ 5,000,000
Nil
$42,320,000
Loan Disbursement:
The Borrower requests that the Loan be disbursed the Borrower’s bank account with the
National Australia Bank, being such account number as advised by the Borrower to the
Lender.
(x)
Fixed Interest Rate:
The Borrower will pay interest on the loan at the ordinary rate of 5.25% per annum fixed
(and non-reviewable) to the “Date of Final Payment” entered above (the fixed rate period).
[56]
Clause 3 of the Agreement in turn provided:
[57]
3.1
The Borrower shall repay the Loan together with the Borrowers
Payments as detailed in the clause v of Schedule 1 on the Dates set
out in Schedule 1.
3.2
Interest accrues daily but is payable in arrears on each Payment
Date.
3.3
Any moneys payable to the Lender shall be paid, without any set-off
or deduction whatsoever, not later than 1.00 pm on the due date by
direct debit authority to the account of the Lender advised to the
Borrower.
3.4
If any due date is not a Business Day, payment shall be made on the
next Business Day unless that next Business Day occurs in the
following month, in which event the payment shall be made on the
previous Business Day.
3.5
If the Borrower does not make any payment (including a payment of
interest) on or before its due payment date, interest on the amount
unpaid shall be paid by the Borrower at the Default Rate both before
and after judgment for the period from the due payment date until
the actual date of payment. Default interest will accrue daily, and
will be compounded monthly.
3.6
If any payment is made after 4.00 pm on the due date the Borrower
shall pay to the Lender, immediately upon request, interest on the
payment concerned at the Default Rate until the next Business Day
as if the payment were made on the later day.
3.7
If the Loan is not advanced on the Availability Date, the Borrower
shall pay to the Lender on the Date of Advance (or the date the
Facility is cancelled, as the case may be) a commitment fee for the
period from the Availability Date until that day. The fee will accrue
daily and will be charged at a rate per annum certified by the Lender
to be qual to the Interest Rate less the rate then paid by the Lender
for call deposits of amounts similar to the Loan. The minimum rate
to apply under this sub-clause shall be five per cent per annum.
3.8
If the Loan is not repaid on the Date of Final Payment, the Late
Payment as set out in the Loan Terms will apply.
3.9
The Borrower may prepay the Loan as set out in paragraph (vii) in
Schedule 1.
Clause 6 dealt with events of default. Relevantly it provided:
6.1
If at any time and any reason, whether or not within the control of
the party:
(a)
The Borrower fails to pay on its due date:
(i)
Any amount payable under any Relevant Document;
or
(ii)
Any amount payable by the Borrower to the Lender
on any account whatsoever;
then this Agreement, the Securities and the other Relevant
Documents shall become immediately enforceable and the Lender
may, at any time, by notice to the Borrower:
(s)
Cancel the Facility; and
(t)
Declare all or any part of the Loan and any other
indebtedness of the Borrower under the Relevant Documents
to be, and that indebtedness will be, due and payable either
immediately or upon demand or at a later date as the Lender
may specify.
Subsequent events
[58]
The loan was due to be repaid by 26 October 2012. It was not. That in my
view was a clear event of default under the Loan Agreement making the
indebtedness repayable upon demand.
Furthermore, under the GSA Torchlight
became exposed to the onerous enforcement rights granted to Wilaci. Clauses 12
and 13 included the right to take possession of and sell Torchlight’s property, to take
control of and manage Torchlight’s business and to place Torchlight into
receivership. Significantly also, the “Late Payment fee” began to accrue.
[59]
The defendant did not immediately make demand.
Rather it sought to
manage repayment, which it eventually achieved by seven tranches, the first on 1
October 2013 and the last on 2 May 2014.
That period is one Mr Skidmore
describes as characterised by “endless excuses and broken promises” from Mr Kerr
and by various settlement agreements which were not performed.
[60]
Wilaci places significant emphasis on the many communications from Mr
Kerr in the period October to December 2012 which indicate his belief that the Loan
Agreement provided for the right to extend repayment beyond the due date, albeit on
payment of the Late Payment fee. Characteristic of those communications is the
email of 26 October 2012 referred to in [26].
[61]
The rationale for this approach was obvious. Neither from RCL cash flows,
capital raising nor alternative borrowings had Torchlight been able to secure funds
with which to make the repayment. It was buying for time and Mr Kerr’s consistent
refrain was that the facility provided Torchlight with an “equity bridge” in the
context of new capital raising, whenever completed. In an email sent by Mr Kerr to
Mr Skidmore on 15 December 2012 (in turn intended to be forwarded to Mr Grill),
Mr Kerr went so far as to identify equity as the largest cost to most businesses and
the fact that:
If we are prematurely forced to close [the equity raising programme] before
we are legally entitled to under the equity bridge the cost of that is
theoretically and practically A LOT MORE THAN 5M AND 500K A WEEK
– eg a needless 10% dilution is $30m to $60m”.
[62]
To similar effect was his observation on 22 December that Wilaci’s financing
was “cheap for equity bridge expensive for debt bridge”.
I will return to
consideration of this correspondence in my discussion of the defendants’ first
argument, namely that the law of penalties is not engaged because what was
contemplated by the Late Payment fee was a sum payable for an additional service,
namely extension beyond due date.
Receivership
[63]
On 29 May 2013 Wilaci served a demand on Torchlight in the amount of
AUD 33,628,934, comprising:
[64]
1.
The AUD 5m fee;
2.
Accrued Late Payment fees;
3.
Term interest of AUD 320,000.
The demand went unsatisfied and on 10 June Wilaci appointed the first
defendants as receivers.
[65]
On 4 November 2014 Wilaci served a statutory demand in response to which
Torchlight paid the AUD 320,000 term interest and AUD 1m on account of the initial
AUD 5m fee, with further funds placed on deposit with its New Zealand solicitors to
cover the balance of that fee and accrued interest. Shortly before trial, Torchlight
conceded its position in respect of the balance of the facility fee and now accepts that
sum, together with accrued interest on it, as payable. At the commencement of trial I
was advised that the plaintiff had now directed its solicitors to make immediate
payment of such sums. I nevertheless intend to give judgment for them having not,
at the date of publication of this judgment, received confirmation of the payment
from Wilaci.
The law
Introduction
[66]
Clause 12.7(a) provides that the Loan Agreement is governed by the laws of
New South Wales. Both Torchlight and Wilaci called expert evidence in terms of the
applicable law.
[67]
For Torchlight, evidence was given by Dr Kevin Lindgren AM QC, a retired
Judge of the Federal Court of Australia, and Elisabeth Peden, a former Professor of
the University of Sydney law faculty who has, since 2008, practised as a full-time
barrister in Sydney. Wilaci’s legal expert was Mr Francis Douglas QC, a senior silk
based in Sydney.
[68]
Dr Peden gave evidence in person and was cross-examined. The affidavit
evidence of Dr Lindgren and Mr Douglas (including a second affidavit filed by Mr
Douglas in response to certain matters raised with Dr Peden in supplementary oral
evidence) were received without cross-examination. I was invited by the parties to
consider any of the authorities referred to by the various experts in the assessment of
their evidence. These were collected in what were ultimately five bundles. I have
accepted that invitation in relation to a number of authorities.
[69]
There are substantial areas of agreement between the experts but some
important differences of emphasis and detail.
Applicable rules of precedent
[70]
I start by summarising the principles of the precedent applicable under
Australian law had this matter been decided by a Judge of the Supreme Court of
NSW.
[71]
These principles are summarised in Mr Douglas’ second brief of evidence
and are not disputed by the plaintiff.
[72]
Mr Douglas deposes that the question of precedent in Australia is governed
by the hierarchical nature of Australia’s court system. He states:
Judgments pronounced in the federal sphere, other than in [the] High Court,
which is the ultimate appellate court from both federal courts established
under Chapter III of the Constitution and the States’ Supreme Courts, are
persuasive only in the State Courts. Judgments of the Courts of Appeal of
the States or Territories are binding on first instance judges in the State or
Territory concerned in accordance with the principles of stare decisis, and
persuasive authority in other States and Territories and in Federal Courts.
Otherwise judgments at first instance are persuasive
[73]
He goes on, however, to cite the recent decisions of Farah Constructions Pty
Ltd v Say-Dee Pty Ltd5 and Duckworth v Water Corporation,6 the latter being what
he describes as “the last word on the subject”, in support of the view that equivalent
trial judges in the respective Supreme Courts of the various Australian States should
follow each other unless satisfied that the earlier decision was “plainly wrong”.
[74]
The specific question put to Mr Douglas and referred to in his second brief of
evidence related to the precedent value before the NSW Supreme Court of a
Queensland Supreme Court decision. That arose out of Mr Douglas’ reliance on the
decision in PT Thiess Contractors Indonesia v PT Arutmin Indonesia,7 which Dr
Peden described in her supplementary evidence as “a first instance decision of the
Queensland Court and it will not be binding in NSW”.
[75]
Mr Douglas’ evidence in that respect, following on from his discussion of the
cases previously referred to, was that:
This would mean that it would only be open for a Justice of a Supreme Court
of New South Wales to depart from a decision of a Justice of the Supreme
Court of Queensland if he or she were persuaded that authority was plainly
wrong. In any event, if the reasoning of the Justice of the Supreme Court of
Queensland was based on a decision or decisions of an intermediate
appellate court or courts, including the Full Court of the Federal Court, they
would be obliged to follow the reasoning of that intermediate appellate
5
6
7
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 at [135].
Duckworth v Water Corporation (2012) 261 FLR 185 (WASC) at [31].
PT Thiess Contractors Indonesia v PT Arutmin Indonesia [2015] QSC 123.
court, unless it was plainly wrong. Obviously all subordinate courts, whether
State or federal are bound in accordance with the principles of stare decisis
by the High Court of Australia.
Issues
[76]
The parties and their experts agree that two discrete legal issues emerge from
the proceedings, namely:
1.
Whether the penalty doctrine is engaged at all; and
2.
If it is engaged, whether the Late Payment fee is properly
characterised as penal or as a genuine pre-estimate of damage in the
relevant sense.
The first issue
[77]
The first issue is one of construction of the contract and involves an
assessment of whether the Late Payment fee is, on the one hand, a sum payable for
an additional benefit or, on the other, is a sum payable upon breach or as a secondary
collateral or accessory stipulation for a primary stipulation.
The position is
summarised by Allsop CJ in Paciocco v ANZ Banking Group Ltd where he says:8
Sometimes, the proper conclusion may not be that the sum is a genuine preestimate of loss, but that the sum is payable for an additional benefit, a
conclusion made by reference to the antecedent inquiry whether it is a
collateral or accessory clause at all, or whether it is part of the bargain for
another right… If it is so regarded, it necessarily takes its character as
something different in nature from a clause which in terms or in its origins of
contractual creation was intended by the parties as agreed damages.
[78]
That principle had previously been endorsed by the High Court of Australia
in Andrews v ANZ Banking Group Ltd where the Court stated:9
The operative distinction would be that upon which the majority of the New
South Wales Court of Appeal (Jacobs J and Holmes JJA) decided MetroGoldwyn-Mayer. Their Honours contrasted a stipulation attracting the
penalty doctrine and one giving rise consensually to an additional obligation.
8
9
Paciocco v ANZ Banking Group Ltd [2015] FCAFC 50 at [100].
Andrews v ANZ Banking Group Ltd [2012] HCA 30, (2012) 247 CLR 205 at [80].
[79]
In terms of the law relating to the construction of contracts, Mr Douglas
describes this in his second brief of evidence as having been a “very vexed area” in
Australia since the decision in Codelfa Construction Pty Ltd v State Rail Authority
(NSW).10 Since neither of the parties adduced expert evidence in this respect I was
invited by agreement to apply the relevant principles of New Zealand law,
particularly those set out in Vector Gas Ltd v Bay of Plenty Energy Ltd.11
[80]
During argument this issue came to be referred to as the “MGM issue” on
account of the leading authority previously referred to.12 I will do likewise.
The second issue
[81]
Assuming I was to find that the collateral or accessory stipulation was in the
nature of security for the satisfaction of the primary obligation and that the law of
penalties was therefore engaged, each of the experts set out in detail, by reference to
recent relevant authority, the principles which I would be obliged to apply under
NSW law.
[82]
Those principles are far from alien to a New Zealand lawyer or judge given
the extent to which English common law and equitable principles have infused the
jurisprudence of both jurisdictions.
[83]
As Dr Peden explained in her evidence, the jurisdictional basis for the Court’s
involvement is that penalty clauses purport to oust its jurisdiction to determine the
appropriate damages on breach of contract. The plaintiff in a breach of contract
claim is only entitled to contractual damages as assessed by the Court unless the
parties have themselves provided for a genuine pre-estimate of loss as a proxy for
the Court’s assessment.
10
11
12
Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] 149 CLR 337.
Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5.
Metro-Goldwyn-Mayer Pty Ltd v Greenham [1966] 2 NSWLR 717 (NSWCA).
Dunlop
[84]
Each of the experts take as their starting point on the second issue the
formulation by Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v New
Garage and Motor Company Ltd13 — one applied by the High Court of Australia in
Ringrow Pty Ltd v BP Australia Pty Ltd14 and described by the High Court in
Andrews as being a product of centuries of equity jurisprudence.15
[85]
The relevant passage from Lord Dunedin’s judgment in Dunlop is well
known but usefully repeated.16
13
14
15
16
1.
Though the parties to a contract who use the words “penalty” or
“liquidated damages” may prima facie be supposed to mean what
they say, yet the expression used is not conclusive. The court must
find out whether the payment stipulated is in truth a penalty or
liquidated damages. This doctrine may be said to be found passim in
nearly every case.
2.
The essence of a penalty is a payment of money stipulated as in
terrorem of the offending party; the essence of liquidated damages is
a genuine convenanted pre-estimate of damage…
3.
The question whether a sum stipulated is penalty or liquidated
damages is a question of construction to be decided upon the terms
and inherent circumstances of each particular contract, judged of as
at the time of the making of the contract, not as at the time of the
breach…
4.
To assist this task of construction various tests have been suggested,
which if applicable to the case under consideration may prove
helpful, or even conclusive. Such are:
(a)
it will be held to be penalty if the sum stipulated for is
extravagant and unconscionable in amount in comparison
with the greatest loss that could conceivably be proved to
have followed from the breach….
(b)
it will be held to be a penalty if the breach consists only in
not paying a sum of money, and the sum stipulated is a sum
greater than the sum which ought to have been paid…. This
though one of the most ancient instances is truly a corollary
to the last test. Whether it had its historical origin in the
doctrine of the common law that when A. promised to B. a
Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79 at
86-87.
Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656 at 662-663.
Andrews v ANZ Banking Group Ltd above n 9, at [15].
Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd above n 13, at 8688.
sum of money on a certain day and did not do so, B. could
only recover the sum with, in certain cases, interest, but
could never recover further damages for non-timeous
payment, or whether it was a survival of the time when
equity reformed unconscionable bargains merely because
they were unconscionable, … is probably more interesting
than material.
(c)
there is a presumption (but no more) that it is penalty when
“a single lump sum is made payable by way of
compensation on the occurrence of one or more or all of
several events, some of which may occasion serious and
others but trifling damage”….
On the other hand:
(d)
it is no obstacle to the sum stipulated being a genuine preestimate of damage, that the consequences of the breach are
such as to make precise pre-estimation almost an
impossibility. On the contrary, that is just the situation when
it is probable that pre-estimated damage was the true bargain
between the parties….
(citations omitted)
Paciocco
[86]
All experts agreed that the very recent decision of the Full Court of the
Federal Court of Australia in Paciocco v ANZ Banking Group Ltd was among the
most significant in terms of the issues raised in the proceedings. Both that case and
the earlier High Court decision in Andrews concerned class action litigation against
ANZ Banking Group in relation to various categories of late payment and default
fees.
[87]
In Andrews the High Court decided that equity’s jurisdiction to grant relief in
respect of penalties had not been absorbed into the common law doctrine and that,
unlike the common law, the equitable jurisdiction extended beyond cases of breach
of contract.
[88]
The question of whether the various categories of ANZ fees did in fact
constitute penalties fell to be decided by Gordon J in Paciocco in the Federal
Court.17 Her Honour concluded that the Late Payment fee constituted a penalty but
that the other fees did not. ANZ appealed in respect of the former finding, and Mr
17
Paciocco v ANZ Banking Group Ltd [2014] FCA 35.
Paciocco and his company in respect of the latter, to the Full Court of the Federal
Court of Australia. The appeal by ANZ was successful but the appeal by Mr
Paciocco and his company failed. The principal judgment is that of Allsop CJ which
I refer to in some detail below.
[89]
The Chief Justice’s analysis of the principles commences with his discussion,
at [19] – [28] of the decision under appeal. Although Gordon J had recognised that
the circumstances that enliven the penalty doctrine at common law and in equity are
different (breach of contract at law and failure of a collateral or accessory stipulation
in Equity) she held that, common to both was the fact that a provision would not be a
penalty unless it was “extravagant and unconscionable in amount in comparison with
the greatest loss that could conceivably be proved”, thus adopting Lord Dunedin’s
test.
[90]
Allsop CJ then in part paraphrased and in part elaborated on her Honour’s
reasoning by stating:18
The requirement for extravagance and unconscionability and its distinction
from a genuine pre-estimate of damage must require the latter concept to be
a broad objective one, not limited to a clause expressly said to be a genuine
pre-estimate of damage or containing a sum actually fixed in amount by
reference to contemporaneous considerations concerned with such. Rather if
extravagance and unconscionability on the one hand and a genuine preestimate on the other, are to operate as the relevant universe of discourse, the
latter must be a descriptive phrase used to explain a sum paid upon breach of
a term or pursuant to a collateral stipulation upon the failure of the primary
stipulation that is not extravagant and not out of all proportion to the
compensation for the breach or failure of the stipulation. The penal
character of a provision is derived from the extravagance of the relationship
between the payment and the possible loss capable of compensation. If there
is no extravagance present the provision failure of which admits of
compensation is taken to be a genuine pre-estimate of damage, and not penal
in character.
[91]
At [95] – [187] of the judgment his Honour expanded on this analysis. I
identify below the principal points I distill from his discussion:
1.
The assessment of whether a clause in question is penal in character is
one of construction in the wide sense falling to be decided by the
18
Paciocco v ANZ Banking Group Ltd, above n 8 at [25].
meaning and content of the words and on the inherent circumstances
of each particular contract judged at the time of its making.19
2.
This process involves the related tasks of ascribing meaning and
content to the relevant clause (by the usual processes of construction
and interpretation) and also the necessary characterisation of the
clause (as interpreted) in its full context.20
3.
The essential feature of a penalty is that it constitutes a secondary
stipulation, collateral or accessory to a primary stipulation and which
is in the nature of security for and in terrorem of, the satisfaction of
the primary stipulation.21
4.
The secondary stipulation must impose an additional detriment that is
out of all proportion to the loss suffered by the obligee on the failure
of the primary stipulation or that is inordinate or extravagant or
oppressive.22
5.
Although the adjectival descriptions of the relevant disproportion
vary in the cases, “extravagant”, “exorbitant”, “oppressive”,
“inordinate” and “unconscionable” can be seen as broad synonyms.23
6.
The secondary stipulation will be penal if it is not a genuine preestimate of loss.
The Chief Justice noted that the dichotomy of
penalty and genuine pre-estimate is central to the operation of the
penalty doctrine and has its roots in the distinction between
compensation and security.24 However, absent extravagance in the
sense referred to, a provision will not be considered penal even if the
parties did not express the clause to be an agreed pre-estimate of
19
20
21
22
23
24
At [95].
At [95].
At [95].
At [95].
At [95].
At [96] – [98].
damage and even if the parties did not negotiate or set the amount
payable by reference to an estimate of damage.25
At [140] the point is summarised in these terms:
As I have already discussed, the notion of a genuine preestimate of damages is not a description of the contractual or
pre-contractual activity of the parties. Rather it is the
objective reflex of a penalty: a payment on breach or failure
of a collateral stipulation that is not proved to be extravagant
or exorbitant.
7.
Significantly, Allsop CJ then turned to what he called “the legitimate
scope of the compensation that is the subject of the assessment of
extravagance or exorbitance.26
He considered it essential to
distinguish the object and purpose of the doctrine of penalties (the
prevention or limitation of oppressive or unconscionable terms) and
the means of prevention or limitation (the leaving of the obligee to an
action in damages). In respect of the former, the following statement
was given prominence in Wilaci’s submissions:27
The object and purpose of the doctrine of penalties is
vindicated if one considers whether the agreed sum is
commensurate with the interest protected by the bargain:
Andrews (HC) at [75]; Dunlop at 91-93; Clydebank at 15 –
17, 19 and 20; Public Works Commission v Hills at 375 –
376. This is not to say that the inquiry is unconnected with
recoverable damages; but the question of extravagance and
unconscionability by reference, as Lord Dunedin said in
Dunlop, to the greatest loss that could conceivably be proved
to have followed from the breach, is to be understood as
reflecting the obligee’s interest in the due performance of the
obligation.28
8.
At [95] and [183] Allsop CJ emphasised the ex ante nature of the
inquiry, with the result that analysis in terms of exorbitance or
extravagance is to be taken to be part of the assessment of whether the
fee is a penalty, not of assessing the consequences of it being a
25
26
27
28
At [99]-[101]. See also [25].
At [103].
At [103].
At [103].
penalty. It was in this respect, primarily, that the Court considered the
trial judge to have erred (by adoption of an ex post damages analysis).
9.
At [184] – [187] His Honour concluded that the appellant customers
had not discharged their onus of proof. He stated:29
In any given case, what might be critical or decisive in the
examination of all the circumstances might be (as here) the
analysis of the extent of legitimate protection of the
obligee’s interest measured in the manner discussed in
Dunlop, or … the clear contractual purpose of the coercion
of performance by the payment or forfeiture of a large
amount of money. One must examine all the circumstances.
Here given the nature of the relationship, the legitimate
interest of ANZ and the correct analytical perspective, the
fees were not demonstrated to be extravagant, exorbitant or
unconscionable.
Yarra
[92]
The principal authority relied on by Wilaci is Yarra Capital Group Pty Ltd v
Sklash Pty Ltd.30
Mr Douglas went so far as to suggest the facts were “very
analogous”. The first appellant and respondent were money lenders making short
term loans in what were described as “circumstances of significant risk and,
effectively, at unusually higher rates of interest”.31 Characteristic of the loans in
question was one for $100,000 for a two month period with a “once only” fee of
$20,000. For each day that the loan or any part of it was outstanding beyond due
date the first appellant was required to pay the respondent $328.50. It was alleged
that this default rate constituted a penalty and was therefore unenforceable. That
allegation was rejected by the Master, likewise on appeal to a judge of the Supreme
Court of Victoria and on further appeal by a majority in the Court of Appeal.
[93]
The majority’s conclusion appears from [17] – [18] in terms:
[17]
29
30
31
In the present case it is self-evident that the market in which the
respondent operated was materially different from one in which
banks and like institutions lend money. In the latter case there would
probably be acceptable industry benchmarks as to the cost of money
and the prevailing interest rates against which one could establish,
At [187].
Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109 at [15].
At [3].
with relative ease and accuracy, the loss to the lender arising from its
inability to use its money caused by the borrower’s default in
repayment. But the respondent operated in a completely different
market. It was, as I have said, a short term money market where the
loans, effectively, were unsecured and where the cost of borrowing
was, on any view, unusually high, if not exorbitant. In those
circumstances, it would be a complex and expensive exercise to seek
to establish, with any sort of precision, what damage is likely to flow
from a failure by the appellants to repay the principal on the due
date. Thus, the default amount that has been struck by agreement of
both parties probably obviated a “minute and somewhat complex
system of examination which would arise if you were to attempt to
prove the damage”.32 In those circumstances, as I have indicated,
the courts are even more reluctant to grant relief on the basis that the
agreed damages clause is a penalty.
[18]
[94]
Given the terms of these particular agreements and their intended
operation, as I have described, I am not persuaded that it is
reasonably arguable that the default clause is so out of proportion
with the loss that it is likely to flow from the appellants’ breach that
it can be properly characterised as being oppressive.
Importantly however, the majority had earlier concluded that, absent default,
the respondent’s expected earnings averaged out, broadly at about $175 per day,
based on the “up front fee” and that “there is nothing in the material which suggests
that this did not reflect, in general terms, the minimum loss that the respondent was
likely to suffer by reason of the appellants’ breach of contract”.33 So in that sense the
“up front fee” was treated as a proxy for likely loss and, as Mr Hunter submitted, the
default rate (approximately twice) was not considered extravagant or unconscionable
by comparison. It was as the judge under appeal had stated, broadly “in the same
ball park”. Mr Hunter submitted, that had Wilaci regularly lent out substantial sums
for substantial up front fees then the analogy with Yarra would be valid. However,
he emphasised that this was not Wilaci’s evidence, that Wilaci was not in the
business of being a money lender and that it had never in fact “initiated any lending
proposals to borrowers (other than to … family members)”.
To that end, he
submitted the fact that the AUD 500,000 per week represented an annualised return
approximately 10 per cent less than that reflected in the up front fee of AUD 5m did
not, as Mr Gedye contended, make this a stronger case to uphold the payment than
Yarra. Rather, in Mr Hunter’s submission, this was a case where the up front fee was
32
33
Clydebank Engineering and Shipbuilding Company Ltd v Don Jose Ramos Yzquierdo Y
Castaneda [1904] UKHL 3, [1905] AC 6 at 11 per Halsbury LJ.
Yarra Capital Group Pty Ltd v Sklash Pty Ltd, above n 30, at [15].
not an appropriate proxy at all for likely loss and where the default stipulation in fact
provided for a payment many times such loss.
[95]
I consider care is necessary in comparison of this case with Yarra given the
very different natures of the lenders’ business in each case. Its discussion of the
relevant principles is, however, one which, like the experts, I found useful.
Greatest loss conceivably proved or greatest loss likely?
[96]
The test stated by Allsop CJ at [103] and repeated at [137] references the
exact words of Dunlop in terms that the obligee’s legitimate interest in the
performance of the contract is to be assessed by reference to “the greatest loss that
could conceivably be proved to have followed from the breach”.34 In her brief of
evidence, Dr Peden invoked the language of loss “likely to flow from the breach that
protects the relevant interest of the lender”, although later stating:
If the specified sum of the payment obligation in a contract is “out of all
proportion” or “extravagant and unconscionable” in comparison with the
greatest loss that could have flowed from the breach to protect the relevant
interest then the clause will be a penalty”.
[97]
The difference between “greatest loss” and “loss likely to flow from the
breach” was addressed in Dr Peden’s supplementary oral evidence. Her position was
that, in at least four Australian High Court cases of which she was aware and
numerous intermediate appellate decisions, the expression “greatest loss” as used in
Dunlop had been interpreted in the language of loss likely to flow from the breach.
She considered there was not, in fact, any real difference between the respective
formulations because where Lord Dunedin referred to the “greatest loss …. proved”
“you are looking at foreseeable damage, and so foreseeable damage is likely loss”.
[98]
I note that although Mr Douglas responded to other aspects of Dr Peden’s
supplementary evidence by way of a second brief, no challenge was made to her
reference to likely loss as the test appropriately applied.
I infer therefore his
acceptance of that proposition.
34
Paciocco v ANZ Banking Group Ltd, above n 8, at [137]. See also [101] where his Honour uses
the phrase “likely loss”.
[99]
The leading High Court of Australia decision in this respect is that of
Ringrow Pty Ltd v BP Australia Pty Ltd where a unanimous six judge panel said:35
The law of penalties, in its standard application, is attracted where a contract
stipulates that on breach the contract breaker will pay an agreed sum which
exceeds what can be regarded as a genuine pre-estimate of the damage likely
to be caused by the breach.
[100] This was also the formulation adopted by Mason and Wilson JJ in AMEVUDC Finance Ltd v Austin.36
[101] In terms of whether the clause fails for what Cole J referred to in Multiplex
Constructions Pty Ltd v Abgarus Pty Ltd as a “lack of compensatory character”,37 I
intend, therefore (consistent with the principles of precedent referred to earlier in this
judgment), to approach the question of extravagance or exorbitance by reference to
Wilaci’s legitimate interest in performance of the contract assessed by reference to
the damage likely to be caused by Torchlight’s breach. In stating the test that way, I
accept Dr Peden’s proposition that there is in fact unlikely to be any material
difference between the test as articulated by the High Court of Australia and as
appearing in Dunlop by reason of Lord Dunedin’s reference to greatest loss
conceivably proved. I note a similar approach by the English Court of Appeal in
Makdessi v Cavendish Square Holdings BV38 where Clarke LJ described the question
of whether the estimate contemplated is an estimate of the loss “which the innocent
party will probably suffer or which he might suffer” as “something of a barren
controversy”39 and said:40
35
36
37
38
39
40
Ringrow Pty Ltd v BP Australia Pty Ltd, above n 14, at [10].
AMEV-UDC Finance Ltd v Austin [1986] HCA 63, (1986) 162 CLR 170 at 181. See also Yarra
Capital Group Pty Ltd v Sklas Pty Ltd, above n 30, at [12] where the Court referred in the
context of Dunlop to “the disproportion between the agreed sum and the likely loss”.
Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 at 511 and 513.
Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539.
At [76] and [81].
At [81].
Insofar as the court has to decide whether the sum provided for is a genuine
pre-estimate of loss the question, prima facie, is whether it is a reasonable
estimate of the likely recoverable loss of the innocent party.41
The role of oppression within the doctrine
[102] In its submissions Wilaci places significant emphasis on the following extract
from the decision of Dickson J in the Canadian Supreme Court case of Elsley v J G
Collins Insurance Agency:42
It is now evident that the power to strike down a penalty clause is a blatant
interference with freedom of contract and is designed for the sole purpose of
providing relief against oppression for the party having to pay the stipulated
sum. It has no place where there is no oppression.
[103] In his brief of evidence Mr Douglas stated that he considered the passage
consistent with Australian law and likely to be persuasive authority in a NSW Court.
[104] I agree with Torchlight however that, at least within the context of Lord
Dunedin’s example 4(a), oppression in what Mr Hunter calls a “consumer protection
sense” need not be established.
The oppression is that in consequence of the
disproportionality of the collateral stipulation to the loss likely to be caused by the
breach. In Multiplex Cole J referred, in this context, to a clause, “which may be
oppressive in consequence of its monetary impositions indicating that it is not of a
compensatory nature”.43
[105] However, under NSW law a clause may also fail as having been penally
imposed in circumstances rendering enforcement of the clause unconscionable. That
appears from the decision of Cole J in Multiplex.44 Likewise in Yarra Chernov JA
expressed the view, without being required to decide the issue, that, in Australia,
unconscionability is a separate ground for striking down an agreed default provision
41
42
43
44
The judgment goes on to acknowledge however, situations where, although the stipulated
amount may significantly exceed the sum recoverable at common law, it will, nevertheless, not
be considered a penalty because there is a “commercial justification” for its imposition. See [92]
– [104] and [124] – [125]. This is referred to as the “new approach”. None of the experts in the
present case discuss this line of authority in detail. However, in my view what is contemplated
by the “new approach” does not differ materially in result from Allsop CJ’s focus on the extent
to which the clause legitimately protects the obligee’s interest in performance of the obligation.
Elsley v J G Collins Insurance Agency [1978] 2 SCR 916 at 937.
Multiplex Constructions v Abgarus Pty Ltd, above n 37, at 511 which I think captures the
concept accurately.
At 511 and 513.
as a penalty.45
In the present case, Torchlight’s attack is based exclusively on
disproportionality principles.46 However, it emphasises that those principles apply
irrespective of the fact that both Torchlight and Wilaci were sophisticated
commercial parties headed by experienced businessmen. It relies on the following
observation in Makdessi:47
But the fact that the clause has been agreed between parties of equal
bargaining power who have competent advice cannot be determinative. The
question whether a clause is penal habitually arises in commercial contracts,
which enjoy no immunity from the doctrine.
[106] That case involved one party who was “a key figure in the advertising and
marketing world of the Middle East … one of the most influential business leaders in
the Lebanon”48 and another which was “a holding company within the WPP group,
which is the world’s largest market communications services group”.49
The
agreement between these two parties had been the subject of extensive negotiations
over six months.
Both were represented by highly experienced lawyers.
The
relevant stipulation was nevertheless found to be penal.50
Admissible evidence
[107] Australian authority contemplates that, even where the attack is based on
disproportionality principles alone,51 a wide ranging inquiry is necessary, in turn
based on a wide range of admissible evidence. In Esanda Finance Corporation Ltd
v Plessnig Wilson and Toohey JJ stated:52
The character of a clause as penal or compensatory is then to be perceived as
a matter of degree depending on all the circumstances, including the nature
of the subject matter of the agreement.
(Emphasis added)
45
46
47
48
49
50
51
52
Yarra Capital Group Pty Ltd v Sklash Pty Ltd, above n 30.
Refer to memorandum of 7 September 2015.
Makdessi v Cavendish Square Holdings BV, above n 38, at [75(v)].
At [2].
At [4].
The decision has been the subject of an appeal to the UK Supreme Court heard 21-23 July 2015.
Judgment is currently reserved.
And a fortiori, it would appear, if the attack is on the basis of unconscionability.
Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131.
[108] As Cole J noted in Multiplex:53
If one is to have regard to “all of the circumstances, including the nature of
the subject matter of the agreement” in determining as a matter of degree
whether a clause is penal or compensatory, one would need to know of the
relationships between the parties at the time of the contract, the genesis of
the clause, discussions concerning it, the bargaining position of the parties,
whether they were each fully advised and whether, in all the circumstances
the party now claiming the ineffectiveness of the clause, at the time of the
contract appreciated the likely imposition under the clause in consequence of
its breach yet nevertheless agreed to the clause presumably because the
contract was perceived to be beneficial to him notwithstanding the existence
of the liquidated damages clause.
[109] More recently Allsop CJ stated in Paciacco that the Court may have regard
to:54
[evidence concerning] the origin and evolution of the liquidated damages
clause and, in particular, the reasons for its particular form, the discussions
that had occurred regarding it and its object.
[110] In the course of the evidence, a difference emerged between Dr Peden and Mr
Douglas in terms of whether a Justice of the Supreme Court of NSW would be
entitled to take into account the uncommunicated views of the parties in determining
whether a particular stipulation was a penalty. In her supplementary oral evidence
Dr Peden stated that, although the process of construction engaged in to determine
whether a stipulation is a penalty included evidence of surrounding circumstances
and that in some cases the negotiations of the parties fell within that concept, this did
not include “one party’s subjective belief, instead it is the communicated views of
the parties in their negotiations”.
[111] Mr Douglas took issue with this in his supplementary brief. He relied on the
following passage from the Chief Justice’s judgment in Paciocco:55
The primary Judge did not consider the material tendered about ANZ’s state
of mind to be relevant. In the context of dealing with the Late Payment fee,
her Honour said that the inquiry as to whether a fee was a genuine pre-
53
54
55
Multiplex Constructions v Abgarus Pty Ltd above n 37, at 512-513.
Paciocco v ANZ Banking Group Ltd, above n 8, at [209].
At [225]. See also [212] where His Honour referred to “all the circumstances and evidence
tending to illuminate all the circumstances” as being admissible to assist with the process of
characterisation as to whether the clause is penal or is a genuine pre-estimate of damage in the
relevant sense.
estimate of damage was one that did not invite any inquiry into the parties’
states of mind at the time of the contract: see [126] of the reasons.
With respect I do not agree. The views of the parties may well not conclude
the inquiry but, as in Clydebank, with the correspondence between the
parties, as in Multiplex, with the precontractual discussion of the parties, and
as in Dunlop, with Mr Beazley’s evidence of the purpose of the clause, the
approach and purposes of the parties may be of some assistance and
understanding of both what was intended and whether it had a legitimate
commercial justification.
[112] In Mr Douglas’ opinion, this portion of the judgment, taken together with the
discussion which preceded it, makes it clear that the Full Court of the Federal Court
considered that the subjective states of mind of the parties at the time of entering into
the contract were relevant to the inquiry whether a fee had some legitimate
commercial justification. Acknowledging that both the Clydebank56 and Multiplex
cases referred to by Allsop CJ in the passage quoted involved subjective views which
had been communicated to the counter-party in some way, he stated that was not the
case with Mr Baisley’s views in Dunlop and, in any event, both the reasoning of
Allsop CJ in Paciocco and the actual admission of evidence of ANZ’s
uncommunicated state of mind57 militated against Dr Peden’s narrower approach.
Mr Douglas concluded:
In my opinion, the cases that are being referred to by Professor Peden, in the
answer which she gave to Mr Hunter are not cases relating to the
characterisation of the stipulation as a penalty. They are cases relating to the
interpretation of contracts, which has been a very vexed area in Australia
since the decision of Codelfa Construction Pty Ltd v State Rail Authority of
NSW. In that regard, what she says is entirely correct, but it is not directly
applicable to the question of the characterisation of a stipulation as a penalty
and the evidence admissible for that purpose.
[113] Mr Douglas then referred to the very recent decision of Jackson J in P T
Thiess Contractors Indonesia v PT Arutmin Indonesia and, in particular, the
following passage at [190] of his Honour’s judgment:
In my view, it is an error to treat the question of exorbitance, extravagance or
oppression as subject to the parole evidence rule as to the admissibility of
extrinsic evidence of the construction of a contract in writing.
56
57
Clydebank Engineering and Shipbuilding Company Ltd v Don Jose Ramos Yzquierdo Y
Castaned, above n 32.
Said to be deterrence of customers breaking their account limits.
[114] In making that observation his Honour cited Paciocco58 and also another very
recent decision of the Queensland Supreme Court in Grocon Constructors (QLD) Pty
Ltd v Juniper Development No.2 Pty Ltd and Anor.59
[115] Mr Douglas in turn noted that the Grocon case is itself based on two
decisions of the Court of Appeal of NSW, Luu v Soverign Developments Pty
Limited,60 and Fermiscan Pty Ltd v James.61
[116] Referring to his earlier evidence in relation to the precedent value of various
decisions before the NSW Supreme Court, Mr Douglas concluded that only in the
event a NSW Supreme Court judge considered Paciocco, Multiplex,62 and Thiess to
be plainly wrong would they not be followed, and the very broad range of material
which they recognise as relevant in the characterisation process not therefore be
admitted.
[117] Mr Douglas says that there is no basis for suggesting the approaches are
plainly wrong as they are supported by House of Lords authority. Moreover, in his
opinion:
… quite apart from any of these matters such a Judge [of the Supreme Court
of NSW] would consider himself or herself bound by the two NSW Court of
Appeal decisions of Luu and Fermiscan relied upon by both Queensland
Judges as part of their reasons which would be binding on a first instance
Judge in NSW.
[118] Mr Douglas was not cross-examined on his supplementary (or substantive)
brief and I adopt his views as consistent with the authorities cited. To that end, I
intend, in my assessment of whether the clause is penal or compensatory, to look at
all of the surrounding circumstances, including the views or states of mind of the
parties, whether communicated or not.
58
59
60
61
62
Paciocco v ANZ Banking Group Ltd, above n 8, at [209], [211] – [212] and [225].
Grocon Constructors (QLD) Pty Ltd v Juniper Development No.2 Pty Ltd and Anor [2015] QSC
102 at [116].
Luu v Soverign Developments Pty Ltd [2006] NSWCA 40, (2006) 12 BPR 23, 629.
Fermiscan Pty Ltd v James [2009] NSWCA 355; (2009) 261 ALR 408 at [133] – [134].
Which he says would be regarded as highly persuasive being a decision of a well known
commercial Judge, subsequently a Judge of Appeal in New South Wales.
The MGM issue
[119] The issue in this respect is whether the penalty doctrine is engaged at all. The
answer depends on whether Late Payment fee is a collateral/accessory clause or
whether it is in fact a part of the bargain for another right – in effect the agreed price
for continuing to provide the loan funds beyond 26 October 2012.
Dr Peden
summarised the issue as follows:
[O]n the agreement as set out, are there in fact two primary obligations to
pay separate sums of money, or is there one primary obligation to do
something, failing which another sum will be payable.
[120] The issue is one of construction which, as invited to do, I approach in
accordance with the principles set out in the standard authorities including Vector
Gas Limited v Bay of Plenty Energy and Investors Compensation Scheme Ltd v West
Bromwich Building Society.63 Neither Mr Gedye QC nor Mr Hunter contended that
this was a case requiring exploration of the more nuanced issues which have
emerged from these authorities. I approach the matter on the basis that even words
with an apparently plain and unambiguous meaning must be considered within the so
called factual matrix given that such words, devoid of external context, may not
ultimately be what a reasonable person aware of all the relevant circumstances would
consider the parties intended their words to mean.64 However, the proscription on
taking into account the subjective views of the parties is one usefully emphasised,
particularly in a case such as this where Wilaci placed significant emphasis on Mr
Kerr’s claims, immediately before and after default, that the agreement provided for
“flexibility” in the repayment date by virtue of the weekly Late Payment fee.
[121] The leading Australian Authority is that of the New South Wales Court of
Appeal in Metro-Goldwyn-Mayer Pty Ltd v Greenham.65 In that case exhibitors of
films were permitted to screen the films once, at a designated time in return for the
payment of a hireage fee. Clause 56A of the relevant contract provided that:
63
64
65
Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHC 28;
[1998] All ER 98.
Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 11, at [4] per Blanchard J, [22] per Tipping J
and [64] per McGrath J.
Metro-Goldwyn-Mayer Pty Ltd v Greenham, above n 12.
If the exhibitor without the consent in writing of the Distributor exhibits or
permits to be exhibited any film on or at any date or time or at any place not
authorised by this Agreement the exhibitor shall pay as hire for each such
exhibition four times the amount of the hire calculated in accordance with
clause 54 as at each day on which the film was so exhibited or permitted to
be exhibited were an authorised exhibition date on which the Exhibitor
without excuse had failed to exhibit.
[122] The defendant exhibited the films on 12 “unauthorised” occasions in respect
of which MGM sued for four times the hiring fee for each such screening. It was
met by an argument that such sums were irrecoverable as a penalty.
[123] At first instance this defence was successful. By a majority the Court of
Appeal held that, on its true construction, the relevant clause provided the hirer with
the option of rescreening the film provided he paid an additional hiring fee and that it
was not, therefore, in the nature of a penalty. Despite a consent position in the Court
below, it held that there was no breach of the agreement as a result of the defendant
rescreening the film and, accordingly, the question of whether the payment
represented a penalty or unliquidated damages was not engaged. The majority
judgments were given by Jacobs JA and Holmes JA. At page 723 the former stated:
Upon such an approach it seems to me that clause 56 is properly regarded as
one providing for an additional hiring fee in the event of an additional
showing of a film. It may well be intended by the agreement that such an
additional showing should be strongly discouraged. For this reason a very
large hiring fee compared with the original hiring fee is provided. However
that does not make the clause a penalty clause… First it would be necessary
to determine that cl 56(a) truly dealt with damages and not with hire of the
film for a further occasion or occasions. In the light of the interpretation that
I have given to the agreement I do not see how, despite the language of
clause 9, the clause in question can be regarded as a clause dealing with
damages. There is no right in the exhibitor to use the film otherwise than on
an authorised occasion. If he does so then he must be taken to have
exercised an option to do so under the agreement if the agreement so
provides. The agreement provides that he may exercise such an option in
one event only, namely he pay a hiring fee of four times the usual hiring fee.
In my view this is not a clause dealing with damages but is dealing with the
price of such an option.
[124] His Honour went on to note that, if this were not the case, an exhibitor who
showed the film at an additional time would be liable in conversion, and thus for
example liable for the loss or destruction of the film irrespective of negligence which
he said, “would be to part a long way from the intention of the words used in the
standard form of contract”.66
[125] Holmes JA in turn held:67
I am of the opinion therefore that cl 56 does not relate to the breaches of the
agreement and the law with respect to liquidated damages and penalties, as
developed in the common law, have no application to the agreement.
[126] In the result, the outcome was dictated by a close reading of the relevant
provision. Although screenings outside the stipulated time were not authorised,
neither were they regarded as being in breach.
The contract on its proper
construction facilitated such showings, albeit for an additional and substantially
increased fee.
[127] Turning to the present case I start my analysis with the terms of the contract.
[128] In that respect Torchlight differentiates between the facility fee (a one off fee
to be paid regardless of when the loan is repaid), the Interest Rate and Default Rate
(which are contractually the same rate) and the Late Payment fee which it says is a
separate obligation which applies when the principal is not paid on the date of final
payment.
[129] It says, relying on the pleadings and the agreed Statement of Facts, that the
final payment date was 26 October 2012. It relies on what it calls the plain meaning
of the contract to say that the Loan Agreement made no provision for the flexibility
that Torchlight contended for ex post facto and that, if the case had arisen in different
circumstances and Torchlight was arguing for some right to repay “flexibly”, that
contention would not even reach the arguable case threshold necessary to defeat
summary judgment. It says that no amount of wishful thinking on the part of
Torchlight in 2012 can change that basic reality. It was a Loan Agreement with a
fixed repayment date giving rise to potentially draconian consequences in the event
of default.
It was not an “equity bridge”, “repo agreement”, “partnership”, or
whatever else Torchlight might have hoped it to be.
66
67
At 724.
At 727.
[130] Wilaci contends that the terms of the contract do not preclude a finding that
the fee was, in substance, a fee for further accommodation. It accepts that nonpayment on due date was an event of default and a breach of the requirements in
clause 3.1. However, it says that the late fee provisions are not expressed to engage
as a result of a breach of clause 3.1 or an event of default. It says that it is not the
fact of a breach which is stated to give rise to the payment and, in fact, the money
continued to be held by the borrower. It says that clause 3.8 recognises that the loan
money may continue to be enjoyed by the borrower after due date (as a matter of
fact) and the lender may remain unpaid. It then goes on to say that in its full factual
context, to which I will return shortly, the fee is appropriately recognised as the
agreed price for continuing provision of funds.
[131] I consider the position in this case materially different from that in MetroGoldwyn-Mayer by virtue of the fact that it is undisputed that a failure to repay on 26
October 2012 gave rise to a breach of the agreement and an event of default. There
was no option to extend beyond that date as the majority of the Court of Appeal in
MGM was able to identify on the particular wording of 56(a). That wording did not,
in the majority view, amount to a prohibition but rather defined the terms on which
the option might be exercised. Although as Wilaci argues, the fact of having
breached a term does not necessarily preclude the provision of further services or the
requirement to pay for them, where an obligation arises on and contemporaneously
with breach it will, in my view, typically be referable to the breach and in that sense
collateral to it rather than arising independently. I see nothing in the particular words
of this contract which suggest any different result. The reference to the date of final
payment militates strongly against the construction for which Wilaci contends.
[132] I find compelling Torchlight’s argument that it would be unable to have
resisted a claim brought on 27 October 2012 for repayment of the loan on the basis
that the Late Payment fee provided for some undefined period of “flexibility”. If, as
I believe, any such resistance would have been futile, it is difficult to see why a
different approach should inform the MGM issue.
[133] Nor, having regard to the admissible factual context do I consider any
alternative construction of the relevant provision is required. In particular:
(i)
There was no mention of flexibility prior to the parties’ agreeing to
the terms of the Loan Agreement. Mr Skidmore reassured Mr Grill in
numerous emails that he had “a solution that guarantees $37 M to be
… payable on the 60th day”, “on day 60 the $37 M will be paid out
and extinguished” and that he was “100 per cent confident of the fact
that you will exit this in 60 days time”.
(ii)
The whole premise of Mr Grill’s desire to “incentivise” repayment on
day 60 was to ensure that Wilaci got its money back at that time.
(iii)
At no stage, either in the correspondence which passed between the
parties before or after due date, or in his evidence at trial did Mr Grill
give any indication that the plaintiff had flexibility to repay the money
late or that the Late Payment fee had been agreed as the price of that
flexibility.
To the contrary, his approach, part cajoling, part
encouraging, part threatening, was to endeavour to achieve repayment
as quickly as possible against what was identified as an event of
default. His email to Mr Kerr of 11 December 2012 at 8.55 am
summarises his position in terms:
It is good that you now acknowledge that the $500 K per
week applies after 60 days. Your previous unwillingness to
acknowledge this has been a major point of disagreement.
Payment of the $5m fee on the 27th is fine. The date the
interest payment was due is, I believe, clear in our
agreement.
I am advised that you went into default under the agreement
when you did not repay the loan on the due date i.e after 60
days.
I have been delaying issuing a default notice to give you the
chance to make repayments under the loan. I feel after all
this time that if you can’t make your initial payment on the
date you have specified then it is time to issue the default
notice.
(iv)
Whatever flexibility Torchlight wanted or convinced itself it had is, in
my view, irrelevant in that context. The fact is that it never had such
flexibility. It was, as Mr Grill himself said in “default” from 26
October 2012.
(v)
The case is not therefore one where subsequent conduct can be called
in aid of the construction exercise I am required to undertake.68 This
conduct does not disclose any of the shared intention required. The
ironic fact that Torchlight and Wilaci now find themselves on the
opposite side of the argument each was promoting at the end of 2012
does not change that result.
[134] For the foregoing reasons I reject Wilaci’s argument on the MGM issue.
Penal or compensatory?
[135] I turn now to consider whether the clause is penal in character. 69 As Lord
Dunedin said in Dunlop:70
The essence of a penalty is money stipulated as in terrorem of the offending
party; the essence of the liquidated damages is a genuine covenant preestimate of damage.
Plaintiff’s submissions
[136] Torchlight submits that this is in fact one of the easier penalty cases to come
before the courts. Whereas in many (Paciocco being a classic example) a complex
and detailed analysis may be necessary to determine whether a clause is penal in
character, it says that, in this case, the evidence is irrefutable that the Late Payment
fee was set for the purposes of incentivising the payment or, to use Mr Grill’s actual
words “to provide enough incentive to make sure the deal gets settled within 60
days”.
[137] To similar effect is Mr Jeston’s observation to Mr Grill in an email enclosing
his due diligence note where he refers to the default terms as being “strong and
provid[ing] sufficient impetus to ensure Torchlight is focused on repaying you on
68
69
70
Wholesale Distributors v Gibbons Holdings [2007] NZSC 37, [2008] 1 NZLR 277 eg at [52].
Paciocco v ANZ Banking Group Ltd, above n 8, at [95].
Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd, above n 13, at
86.
time…” And likewise Mr Skidmore referred to the “aim” of the payment as being
“to incentivise settlement on day 60”.
[138] Accordingly Torchlight says that the dominant purpose of the clause was selfevidently in terrorem and that this of itself answers the characterisation issue the
Court is obliged to undertake. It says that such character is frankly recognised in
contemporary correspondence which refers to the payment as a “penalty”.
[139] I do not regard that particular reference as determinative (albeit telling). The
authorities make it clear that the question of whether a provision is penal is to be
approached as one of substance not form. Moreover, as Wilaci points out there are
other contemporaneous references which refer to the payment in more neutral terms,
including Mr Jeston’s reference to “default interest” or “new default payment terms”.
The reference to the aim or purposes of the payment by each of Mr Skidmore, Mr
Gill and Mr Jeston are, in my view, more significant.
[140] As a corollary to its proposition that the payment was and was always
intended to be in terrorem, Torchlight states that the fee did not constitute a genuine
pre-estimate of loss in the relevant sense. It says that the relevant comparison for the
purposes of Lord Dunedin’s test 4(a) is between:
(i)
AUD 500,000 per week (which it emphasises, albeit obviously is
AUD 26M per year); and
(ii)
The damages that Wilaci was likely to suffer if the loan was not repaid
on time.
In that respect it adopts the approach in Ringrow Pty Ltd, which I have already
identified as applicable.
[141] Torchlight accepts that the likely damage is to be assessed ex ante but says
this does not preclude reference to the losses which have in fact been suffered,
relying on Phillips Hong Kong Ltd v Attorney-General of Hong Kong.71
[142] It says that Wilaci’s likely loss was its ongoing interest cost to Credit Suisse
which was, in any event, covered by the 150 basis point margin specified in the Loan
Agreement. That cost was a variable one but averaged around five per cent per
annum. Thus, on an ex ante basis it says Wilaci’s loss in the event of late payment
could be anticipated to be in the order of $35,500 per week in respect of which the
late penalty fee represented a multiple of approximately 14. It points out that for the
period that the loan or part thereof was overdue Wilaci actually incurred additional
interest costs of approximately AUD 1.8m and compares that with its prayer for
relief on the counterclaim in which it seeks default interest of approximately
AUD 2.6m and Late Payment fees of approximately AUD 31.3m, in total
approximately 19 times its actual loss. That of course involves an ex post analysis
with which care is required.
[143] Torchlight acknowledges that the formulation in Ringrow Pty Ltd would be
sufficient to capture any reasonably anticipated increases in Credit Suisse’s interest
rate (although in fact interest rates fell over the relevant period) but it says that the
other losses to which Wilaci refers are entirely fanciful.
[144] These potential losses were traversed by Mr Grill in his brief of evidence. He
emphasised the fact that the loan was financed by borrowings from Credit Suisse
backed by WorleyParsons shares which meant that Wilaci was vulnerable both to
changes in Credit Suisse’s security or LVR policies (his recollection was that such
charges had actually occurred), or to a decline in the value of the shares. In that
context he emphasised the potential for a borrower to have to put up more security or
reduce the loan balance (either of which may not be possible) in which event the
secured shares would have to be sold. This he described as a “disastrous scenario”
because the catalyst would typically be a decline in share values, giving rise to a
forced sale on a low or falling market. Moreover, with such a large parcel to be
71
Phillips Hong Kong Ltd v Attorney-General of Hong Kong [1993] UKPC 3, [1993] 61 BLR 41
at [59].
disposed of by Credit Suisse in forced sale conditions, the price might be depressed
further. As such, he said, there was potential for value to be permanently destroyed,
possibly on a huge scale. He also stated that any sale on a forced basis would have
been extremely unfortunate, not only for his personal reputation but for that of
WorleyParsons of which he was CEO at the time (and later chairman).
He
emphasised his ability to predict, with reasonable accuracy, share movements over
the 60 day term of the loan but his vulnerability in the context of any extended
repayment programme.
[145] Torchlight’s response to this is that it defies reality. It says that Mr Grill and
his interests had very substantial assets, that he was ranked by Forbes magazine as
being the 28th wealthiest Australian in 2012 with net assets of approximately AUD
800m and by Business Review Weekly in the same year as having assets of
approximately AUD 780m. It says that the Credit Suisse arrangements involved a
pledge of only 3.5 million shares in WorleyParsons against the 25 million shares
acknowledged to be held by his interests. Although the number of shares pledged
subsequently rose to 4.6 million Torchlight emphasises that this was at least in part
due to an increase in the loan facility to AUD 43m for reasons unconnected with the
Torchlight arrangements (the evidence was that Mr Grill had made a substantial
draw-down against the facility at the end of 2012 to fund a holiday home in Whale
Beach).
So, it says, Wilaci never pledged more than 18 per cent of its
WorleyParsons shares to Credit Suisse and there were at all times very substantial
margins available in terms of both security and serviceability.
It points to Mr
Skidmore’s initial email to Mr Grill regarding the transaction in terms that it was
“small albeit juicy”.
It says that this correctly characterises the size of the
transaction for someone of Mr Grill’s very considerable wealth, a fact of which Mr
Skidmore was aware from past dealings. It says therefore that Mr Grill was more
than capable of paying down the loan if required from other sources (as he in fact
did) or refinancing it and that the idea that Wilaci would have been forced to sell
WorleyParsons shares, in the context of its actual position is, “pure fantasy”. It
draws the distinction between Wilaci’s speculation about possible losses and the
approach in Paciocco where the ANZ identified concrete losses in the form of
additional regulatory capital costs and collection costs that it was likely to suffer in
the event of late payment.
[146] Addressing an argument on which Wilaci placed significant emphasis,
Torchlight next says that the fact the Late Payment fee, expressed as an annualised
percentage, was approximately 12 per cent less than the AUD 5m 60 day facility fee
(again expressed on an annualised basis72) is irrelevant. That is because it says
Wilaci expressly disavowed any suggestion that it was in the business of money
lending and does not point to any foreseeable opportunities (or indeed any
unforeseen ones) which it was deprived of while the loan was outstanding. It says
that the AUD 5m facility fee cannot, in any event, be equated to an interest rate or
the cost to Wilaci of lending the money for a short period. It was, it says a “one-off”
and in the nature of a profit participation as Mr Skidmore explained in his evidence
in terms:
What it [the deal] actually involves $37m out of John’s coffers straightaway
which you have to borrow to come up with. He then gave the $37m …. to
Torchlight and Torchlight, you know, in the various ownership structures of
PGC and things like that, they were then able to privatise that vehicle, which
gave that $10m uplift that we spoke of, which is where he [Mr Grill] got his
$5m.
$10m bucks uplift and that is where the $5 million yeah comes from in terms
of the profit participation”.
[147] Torchlight contrasts this profit participation with the Late Payment fee which
had a separate and identifiable purpose – namely “incentivising” repayment or due
date.
[148] Finally, Torchlight addresses what it acknowledges as its sophisticated
commercial position, emphasising the extract from Makdessi previously referred to
and the facts of that case. It says that although courts will generally seek to uphold
commercial bargains, it is in precisely that context that the penalty doctrine
habitually arises.
While acknowledging its sophistication, Torchlight also
emphasises the difficult financial position it was in at the time.
72
The relevant comparison is 82.19 per cent per annum and 70.27 per cent per annum.
Defendant’s submissions
[149] Wilaci emphasises, correctly, that the onus is on Torchlight and freedom of
contract is an important consideration.73
[150] In the characterisation of the Late Payment fee as penal or compensatory it
emphasises that:
(i)
The assessment must be made ex ante;
(ii)
Relying on Phillips Hong Kong Ltd v Attorney-General of Hong
Kong, that evidence of conduct subsequent to formation may throw
light on the position as at formation;
(iii)
Characterisation is not decided on the construction of the contract
alone and evidence of surrounding circumstances is admissible to
show the stipulation’s real character;
(iv)
The task is one of construction in a wide sense falling to be decided
on the meaning and content of the words and on the inherent
circumstances of each particular contract – a process which is neither
mechanical nor sequential.
[151] It emphasises that the true reference point against which to assess losses,
extravagance or unconscionability is the nature and extent of Wilaci’s interest in the
due performance of the obligation, adopting the approach in Paciocco.
[152] Focusing first on the terms of the Loan Agreement, Wilaci says that there is
nothing to characterise the fee as serving only as a security or deterrent. It says that
the fee does not operate arbitrarily in the event of breach regardless of scale or
significance because there is a direct value relationship between the late fee and the
level of principal remaining unpaid. It also says there is a direct time relationship in
that the fee is payable only for the same period that the principal remains unpaid. In
that sense it says the fee has the essential characteristics of default interest and is
73
Relying on Yarra Capital Group Pty Ltd v Sklash Pty Ltd, above n 30, at [11].
therefore prima facie a compensatory provision. It notes that, at the point the late fee
was introduced in the agreement, the previous 500 basis point default rate was
removed.
[153] It also places significant emphasis on the fact the Late Payment fee was, in
percentage terms, lower than the initial fee. It emphasises Mr Grill’s evidence of
contemporaneous calculations that at AUD 500,000 the Late Payment fee was
somewhat less on a weekly basis than the AUD 5m initial fee calculated over the 60
day term. Although that calculation was uncommunicated to Torchlight, Wilaci
submits that it was dealing with someone for whom the arithmetic was elementary
and Mr Grill’s own calculations are admissible extrinsic evidence in characterisation
of the Late Payment fee.
[154] It makes the valid point that the size of the late fee claimed (circa AUD 31m)
is simply a function of the length of time for which the advance was outstanding
despite numerous promises to the contrary, and that it was always within Torchlight’s
power to ensure the claim was at very much modest levels. I do not intend to be
overwhelmed by the size of the claim in total dollar terms, focusing instead on the
purpose for imposition of the term and whether, expressed as a weekly sum, it
represented a genuine pre-estimate in the relevant sense.
[155] I accept also Wilaci’s position that the Court should be wary of any attempt to
make the fee appear oppressive or extravagant by characterising it on an annularised
percentage basis when that was not the approach the parties themselves adopted.
[156] Wilaci then says that an important category of evidence in assessing whether
the clause was penal or compensatory are the many statements made by Mr Kerr in
the period after due date alleging that the late fee was the price for further
accommodation. As such it draws on the same evidence as relied on in the context
of the MGM issue.
It says that such statements are not relied on simply as
admissions that the debt is owed but rather as expressions by the party to be charged
of what was intended by the Late Payment fee provisions and what commercial
sense they made.
[157] I consider that evidence to be of limited value. Although Phillips Hong Kong
Ltd permits examination of actual loss as evidence of what could reasonably be
expected to be loss at the time the contract was made it is not authority for
recharacterisation of a term based on the comments of one party (with an obvious
vested interest in delaying repayment) made after the contract was entered into.
Moreover, if that submission is intended to invoke the “new approach” referred to in
some of the recent English authorities and discussed in footnote [48] above then the
point is, I think, appropriately made that those cases are focused on the extent to
which there is a commercial rationale for the difference between the amount payable
on breach of the agreement and the amount which would be payable if the claim for
damages was brought at common law. Unilateral claims to an “equity bridge” do
not, in my view, assist that inquiry.
[158] In a proposition which I accept, Wilaci then says that the characterisation
issue involves an assessment of the relationship between the parties at the time of the
contract, the genesis of the clause, the discussions concerning it and the bargaining
position of the parties and related matters. It says that Mr Kerr was sophisticated
and experienced in business and that Torchlight was in receipt of financial and legal
advice throughout. Both propositions are self-evident. By contrast, it says that
although Mr Grill was a highly experienced businessman, Wilaci was not structured
or resourced to act as a commercial lender. It says that the loan was highly risky and
the security by way of GSA was inadequate in that there was no direct security over
the underlying assets held or controlled by Torchlight. Its position in that respect
was supported by the evidence of expert witness Mr Symonds who described the
transaction as “off the scale” in terms of risk, and not one which any commercial
lender would have touched regardless of fees. He was also particularly critical of the
security arrangements which he described as: “very unsatisfactory and inadequate
because it did not prevent dealings with the assets or distribution of proceeds of sale,
it did not enable specific enforcement against assets in the event of fraud” and
“would not have stopped Torchlight encumbering assets or transferring them to
another entity”.
[159] In relation to the surrounding circumstances, Wilaci further says that the Late
Payment fee was freely negotiated and was in fact first offered by Torchlight in an
attempt to persuade Mr Grill to proceed. If, as I find, that was with Torchlight’s
authority, Wilaci suggests that characterisation of the Late Payment fee as
extravagant is a much harder proposition for the plaintiff to sustain.
[160] In summary, therefore, it describes the circumstances at the time of formation
of the contract as involving a unique, high value, risky and off-market transaction
where both parties should be free to set whatever terms they wished and that the case
is at the opposite end of the factual spectrum to cases with the consumer protection
flavour of Andrews and Paciocco.
[161] In relation to the assessment of the damage likely to be caused by the breach,
Wilaci rejects what it calls Torchlight’s narrow approach based on the reasonable
contemplation of those losses at the time the contract was entered into. It says that
such an approach is wrong under NSW law which provides for a broader inquiry
based on the obligee’s interest in the due performance of the obligation. It says that,
in any event, damages in this case would always be difficult to assess in that there
was a range of potentially serious consequences not amenable to ready monetary
calculations including the loss of the shares pledged as security to Credit Suisse and
reputational harm resulting from any such enforcement action.
[162] I consider that care is, however, necessary in this respect. Principle 4(d) in
Dunlop is directed to difficulties in quantification of recoverable loss. It is not an
invitation to ignore principles of remoteness in respect of the type of loss which is
recoverable (and against which the comparison in principle 4(a) is to be conducted).
[163] In respect of Wilaci’s interest in the due performance of the obligation, it
focuses on its desire to maintain a risk profile appropriate to a 60 day advance. I will
return to the submission in more detail later in this judgment.
[164] In relation to extravagance, Wilaci says that whether there is any element of
oppression or unconscionability should inform the question of whether the fee is
extravagant and that neither were demonstrated by Torchlight on the facts. Indeed, it
suggests that this was the case of:
… commerce in its purest form. There was a buyer and seller, both of whom
were willing and both of whom saw justification and benefits in the contract
terms. Neither was suffering from any disability. Both were sophisticated
and it is difficult to contemplate a transaction or a fee term further removed
from the inherent elements of oppression or unconscionability”.
[165] I consider that a fair overall assessment of the relationship of the parties and
note that Torchlight’s claim is not based on oppression or unconscionability as stand
alone concepts. Nor did it challenge the Late Payment fee (unlike, until the eve of
trial, the AUD 5m facility fee) under s 12CB of the ASIC Act as would inevitably
have occurred if oppression had been seriously arguable. As previously indicated,
oppression only arises in this case in a Multiplex sense, namely as a function of
disproportionality between agreed sum and genuine pre-estimate of the damage
likely to be caused by the breach.74
Analysis
[166] I accept that this is to some extent an unusual case in that it is characterised
by unambiguous statements by the obligee (and intermediary Mr Skidmore) about
the aim or purpose of the Late Payment fee. Whether, when the relevant exchanges
took place between Mr Grill and Mr Skidmore, the latter was acting as an agent of
Torchlight is accepted by the parties as ultimately immaterial. He was, I find,
certainly acting on Torchlight’s authority. The parties’ reasons for agreeing the
relevant term are undoubtedly part of the surrounding circumstances legitimately
considered in a characterisation process75 and both Mr Skidmore’s and Mr Grill’s
reasons were clear – the aim was to incentivise repayment on due date.
[167] Resolving the dichotomy which Lord Dunedin draws between the essence of
penalty – a payment of monies stipulated in terrorem, and liquidated damages – a
genuine pre-estimate of damage, will typically, as Dunlop itself recognises,
necessitate a comparison between the sum stipulated and recoverable loss, and an
assessment of whether the former is extravagant in comparison to the latter. If it is,
then the essential question is answered – the payment is considered in terrorem. But
that dichotomy might be more simply answered by direct evidence that the purpose
of the collateral stipulation was to enforce performance of repayment.
74
75
Paciocco v ANZ Banking Group Ltd, above n 8, at [102] – [106].
See the extract from Paciocco cited at [109].
[168] One of the clearest statements in this respect appears in the judgment of
Arden LJ in the English Court of Appeal decision of Murray v Leisureplay Plc,76 a
case to which Mr Douglas QC refers. Although, in respect of other aspects of Arden
LJ’s judgment, Buxton and Clark LJJ took a broader approach, their comments were
not directed to the specific passage I refer to.77 Ardern LJ stated, as one of the
questions which a Court should ask itself following identification of the amount
payable on breach, the amount which would be payable if a claim was brought at
common law and the reasons for agreeing the relevant clause:
Has the party who seeks to establish that the clause is a penalty shown that
the amount payable under the clause was imposed in terrorem or that it does
not constitute a genuine pre-estimate of the loss for the purposes of the
Dunlop case …?
(Emphasis added)
[169] Likewise in Paciocco the Chief Justice identified that if the “clear contractual
purpose”78 was coercion of performance by the payment or forfeiture of a large
amount of money the doctrine will engage irrespective of the Court’s general
deference to bargains entered into by commercial parties.
[170] Mr Grill may well have, as he says, made a quick calculation that, AUD
500,000 per week, the Late Payment fee was not materially different, expressed in
either percentage or weekly terms, from the fee which he had secured for the initial
term. The arithmetic was not hard. But his stated purpose in imposing the Late
Payment fee had nothing to do with any assessment of loss on his part. It was to
“incentivise” repayment – the very essence of an in terrorem obligation. Nor do I
consider the plaintiff’s initial proposal on 17 August 2012 that there be an
“immediate $1m AUD” payment on default and a further AUD 1m per month for
each month thereafter that the facility remained outstanding affects this part of the
analysis. That offer was, as Mr Skidmore put it and I find, a “sweetner” when
Torchlight’s initiatives seemed otherwise to be gaining little traction. A payment is
no less “in terrorem” for the fact that the payer may initially propose it, especially
where the payer itself acknowledges an in terrorem purpose. Tellingly, although I
76
77
78
Murray v Leisureplay Plc [2005] EWCA Civ 963, [2005] IRLR 946.
Note, however, the endorsement of Arden LJ’s approach by unanimous Court of Appeal in
Makdessi v Cavendish Square Holdings BV, above n 38 at [124].
Paciocco v ANZ Banking Group Ltd, above n 8, at [187].
accept not decisively, Mr Skidmore’s email of 17 August identified both the initial
and monthly payments as “penalties”. He used the term again in his exchanges with
Mr Grill a week later.
[171] Tellingly also, Mr Grill opened his negotiations on this point at the level of
AUD 1m per week. There is no suggestion that this equated with any calculation on
his part, either in terms of loss or equivalence with anticipated returns absent default.
It was simply an impost sufficiently draconian to concentrate Torchlight’s mind on
the importance of timely repayment. The same motivation is apparent in the fee
ultimately settled.
[172] I therefore find that the Late Payment fee was as a fact (and adopting the
words of Arden LJ in Leisureplay) “imposed in terrorem” and its “predominant
function”79 was deterrence. The consequences are ones I greet with some reluctance.
Torchlight is a sophisticated party.
Its early dealings with Mr Grill were
characterised by obfuscation around the real requirements for the money (although I
accept the fact of the RCL related commitment was ultimately disclosed). Although
Mr Skidmore had described Torchlight as having “committed but not called for
contributions of AUD 15m which you will have an automatic call on on day 59”
there was an understandable desire on the part of Mr Grill to ensure he got repaid in
a timely fashion and thus to “incentivise” that repayment.
But all that does is
underscore the reasons for imposition of the clause which was in terrorem.
[173] I turn then to consider whether, if the payment is not appropriately considered
unenforceable for the reasons indicated, it is nevertheless unenforceable as not
constituting a genuine pre-estimate of loss in the relevant sense. I accept that, in this
context, there is no requirement on the part of the obligee to demonstrate
contemporaneous calculations supporting a loss assessment.
To that extent the
concept of “genuine pre-estimate” is something of a misnomer. Rather, the approach
of the authorities, either binding or highly persuasive in this case, is to consider
whether the required payment is extravagant or exorbitant in comparison with the
loss likely to be caused by the breach. If not, then the doctrine does not apply. As
the Chief Justice said in Paciocco:
79
genuine pre-estimate is in this sense an
To use the phrase in Makdessi v Cavendish Square Holdings BV, above n 38 at [124].
“objective reflex of a penalty” – a “payment on breach or failure of a collateral
stipulation that is not proved to be extravagant or exorbitant”.80
[174] On an orthodox measure of recoverable losses I accept Torchlight’s
submission that there was a sufficient disproportion between such losses and the
amount of the Late Payment fee to constitute the latter “extravagant”.
[175] There is no doubt that Wilaci’s Credit Suisse funding arrangements were
known to Torchlight and as such there was actual knowledge outside the usual course
of things such that a breach of those special circumstances would be liable to cause
more loss.81 So the second limb in Hadley v Baxendale is engaged in terms of loss
which may “reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as a probable result of the breach of it”. 82
But this exposes the difficulty which Wilaci would have faced, applying orthodox
principles of remoteness, in recovering many of the losses which it suggests could
have flowed from the plaintiff’s breach.
[176] Mr Grill and his related interests were substantial. Although he described the
2012 Forbes Rich List assessment of his wealth at AUD 800m as variously “very
optimistic” and “wildly wrong”, he suggested that he had “never had any question
with the Business Review Weekly numbers”, which, in final submissions, Torchlight
identified as AUD 780m in 2012. However, that figure was not specifically put to
him and Mr Grill’s rejection of what was a very similar figure in the Forbes List
leaves me uncertain as to whether his concession was properly made. Nevertheless,
he was at the time clearly a very wealthy man with his interests holding a
WorleyParsons share portfolio itself worth AUD 500m. Substantial dividend flows
from that source were evidenced in the proceedings.
[177] I have no doubt also that both his home and his beach house were appropriate
to a man of his success. He had previously been in a position where he could
undertake what was ultimately a NZD 27m transaction with Mr Pye, a fact known to
80
81
82
Paciocco v ANZ Banking Group Ltd, above n 8, at [140].
I use the words of Hadley v Baxendale (1854) 9 Exch 341 at 354 and Victoria Laundry
(Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 539.
Hadley v Baxendale at 355.
the plaintiff. He inhabited a realm where a proposed AUD 37m transaction could be
described by someone (with general familiarity of his financial affairs) as “small”.
[178] Against that background, I agree with Torchlight that many of the potential
losses postulated by Wilaci could never be said to have been, in the words of
Ringrow,83 “likely to be caused by the breach”, or as Dr Peden expressed it, in the
category of “losses likely to flow”.84 Mr Grill’s obvious competence in business
together with his clear appreciation of the volatility of share markets (he referred to
WorleyParsons shares having hit a high of AUD 54.19 on 7 December 2007 before
dropping, post GFC, to AUD 12.50 and then recovering to their 2012 values), and
his evidence of a colleague who had taken a margin loan and been required to
dispose of a large parcel of shares at post-GFC lows, persuade me that he would
never have entered into the Credit Suisse arrangements if he thought there was any
realistic possibility of the very pessimistic scenarios he now advances. He and his
interests held a very substantial number of unencumbered shares. Even allowing for
additional borrowings to fund acquisition of a multi-million dollar beach house and
suggested changes in Credit Suisse’s security criteria, only a small percentage of
available shares were ever pledged. There were obvious flexibilities in his position.
[179] Only in the event of some catastrophic decline in the value of WorleyParsons’
shares would any issue have arisen and then only if other assets held by his interests
were similarly affected.
Such “doomsday” scenarios, while always possible to
speculate on, do not form the proper basis of a remoteness assessment.
[180] Nor in my view is it appropriate to include, for the purposes of the relevant
inquiry, loss of the principal sum. It can be safely assumed that this was never
identified as a probable result of failure to make timely repayment. The Wilaci
interests would never have entered into the transaction on that basis.
[181] In my view, at the time the contract was made what the parties could have
reasonably expected to occur in the event of a failure to repay on 26 October 2012,
mirrors closely what actually occurred. The Credit Suisse facility would continue,
83
84
Ringrow Pty Ltd v BP Australia Pty Ltd, above n 14, at [10].
NOE 2/26.
with possible adjustments to security levels reflecting a predictable range of market
variations in share price, all of which Wilaci would be able comfortably to satisfy.
Dividend streams against pledged shares would be paid to Credit Suisse directly in
part or in whole meeting serviceability requirements. Other income (including from
unpledged shares) would be applied to the facility from time to time. Further draw
downs might be made against the facility to finance other requirements.
The
prospect of a forced sale of the share parcel at depressed prices and with the
attendant embarrassment which Mr Grill referred to in his evidence was simply
never realistically on the radar, nor would Mr Grill have entertained the transaction if
it had been. This is a case therefore where as in Phillips Hong Kong:85
What actually happened subsequently … can provide valuable evidence as to
what could reasonably be expected to be the loss at the time the contract was
made.
[182] In that context the loss likely to be caused by the breach and mutually
contemplated as such was, in my view, Wilaci’s ongoing interest cost to Credit
Suisse (covered with a margin of 150 basis points by the contract’s interest rate
provisions, application of which is not disputed in the proceedings).
[183] Such an approach is consistent with the position under Australian Law
described by Dr Peden in terms:
Where the breach is a failure to repay the loan money on time, … the
measure of loss for the purposes of a damages award would be a sum to
compensate for the loss to the lender of the use of the money.86
[184] It is also consistent with the recent English Commercial Court decision in
Equitas Limited & Ors v Walsham Brothers and Co Ltd87 which Torchlight relied on
in its submissions. At [123(iii)] the Court said:
A solvent claimant who seeks to recover damages which exceed the cost of
borrowing to replace the money of which it has been deprived is likely to be
met with the defence that the claim is too remote or that it has failed to
mitigate by borrowing in order to replace the money lost, in which case its
recovery may be limited to that borrowing cost…
85
86
87
Phillips Hong Kong Ltd v Attorney-General of Hong Kong, above n 71, at [59].
Prior to trial the paragraph in which this extract appears was challenged as inadmissible but the
point was not taken further at trial. I would in any event have dismissed the objection.
Equitas Ltd & Ors v Walsham Brothers and Co Ltd [2013] EWHC 3264 (Comm).
[185] Wilaci was demonstrably solvent.
[186] However, it contends that in addition to such losses the Court should, for
example, take into account recovery costs associated with any receivership. It says
that such costs would, from an ex ante perspective, be inherently difficult to quantify
and thus squarely within what Dunlop contemplated as a genuine pre-estimate of
loss. In my view however, it could never have been anticipated that such costs
would represent even a meaningful fraction of the Late Payment fee. At AUD
2.166m per month that fee was undoubtedly extravagant in relation to any such loss.
Moreover, a lender would ordinarily look to its security for satisfaction of receiver’s
fees not a late payment provision. The fact such fees are being incurred assumes, ex
hypothesi the ability to control and/or realise such assets.
[187] In summary therefore, I consider the Late Payment fee so significantly
exceeds the loss likely to be caused by the breach that it qualifies as extravagant and
therefore unenforceable. There may be some room for argument around the margins
in terms of Torchlight’s claim that the total recovery sought is approximately 19
times Wilaci’s actual loss. That calculation involves addition of the contracted
default (and ordinary) interest rate to the Late Payment fee which I do not consider
valid for comparison purposes and, despite the encouragement received from the
passage in Phillips Hong Kong referred to in [169] , focuses unduly on the ex post
position. But there is no doubt that the fee exceeded by a multiple of many times
what I consider to have been the recoverable loss assessed ex ante.
[188] However, Wilaci makes the valid point that, on the approach adopted by the
Chief Justice in Paciocco, the legitimate scope of the comparison which is the
subject of the assessment of extravagance or exorbitance involves an inquiry in
terms of the obligee’s interest in the due performance of the obligation. I accept that
this is a potentially broad and qualitative inquiry and not a mechanical one.88 Wilaci
submits that its interest in the due performance of the obligation embraced all of the
risks and concerns typical of the lender of AUD 37m to a dubious borrower on weak
security. It says that those interests are brought into particular relief by the fact that
it borrowed funds from Credit Suisse and was thus vulnerable to a whole array of
88
Paciocco v ANZ Banking Group Ltd above n 8, at [187].
adverse developments if the loan changed from a short to a long term one. It says
that its interest was to maintain the risk profile and the exposure which it had
assessed for a 60 day loan at the time of entering into the contract and not to have
that expand in an open ended way for an indeterminate period giving rise to
consequent uncertainty and inability to manage risk.
[189] However, as the Chief Justice makes clear, in Paciocco the inquiry into
interests legitimately protected by the bargain is “not … unconnected with
recoverable damages”.89
Nor could it be because otherwise the prohibition on
penalties would be illusory. Where, as here, valid reasons might be advanced for
limiting the period for which the obligee was exposed to risk, it would amount to a
charter for extravagant recovery.
[190] Moreover, this was a secured lending under a GSA giving rise to all the usual
expansive range of remedies.
The parties could not, in that context, have
contemplated an indeterminate exposure. Although Wilaci allowed the loan to run
on, that was its election. It could have declared an event of default and appointed
receivers on expiration of the stipulated 60 day term.
[191] In a more finely balanced case I might be persuaded that Wilaci’s interest in
the due performance of the obligation was sufficient to avoid characterisation of the
fee as extravagant. But I do not consider its claims in that category. There is such a
disproportion between the contracted rate of recovery and what I regard as
recoverable damages at common law that, whether the inquiry is in the terms
identified by Allsop CJ in Paciocco or is into the purported “commercial
justification” for the discrepancy, as some of the more recent English cases suggest,90
the fee does not possess sufficient “compensatory character”91 to save it.
[192] As indicated, the Judge under appeal in Yarra described the necessary
correlation as being in the same “ball park”. That may be more memorable than
helpful given that a recovery almost twice the assessed loss (as was sanctioned in
that case) may be considered by some beyond the limits of the definition but, where
89
90
91
At [103].
Elsley v J G Collins Insurance Agency, above n 42.
Multiplex Constructions Pty Ltd v Abgarus Pty Ltd, above n 37, at 513.
as here, the sum sought to be recovered is many multiples of what I consider to be
the recoverable damages, a finding of extravagance is inevitable.
[193] For the foregoing reasons I hold that the Late Payment fee was an
unenforceable penalty.
Liability of limited partner
[194] Torchlight is not, as a result of an in specie distribution made in 2012, in a
position to pay any debt found to be owing.
In terms of s 16 of the Limited
Partnerships Act the counterclaim defendant is therefore liable for all sums payable
by Torchlight.
Claim for Credit Suisse cost of funds in addition to default interest
[195] Wilaci made a brief submission, unsupported by authority in support of the
proposition that it should, in addition to interest at the contractually stipulated rate of
150 basis points over the Credit Suisse cost of borrowing, also be entitled to be
reimbursed the cost of its borrowing. The amount involved was AUD 1,876,376. It
says that such loss was foreseeable and not too remote.
[196] I am unable to accept Wilaci’s submission. In my view it did not suffer the
loss it alleges. Clause 3.5 provides that if Torchlight does not make payment on or
before its due payment date, interest on the amount unpaid was to be paid at the
Default Rate from the period of the due payment date until the actual date of
payment. The Default Rate was defined in Schedule 1 to be at the same level as the
“then current Interest Rate”. The Interest Rate was set by adding a margin of 150
basis points to the Credit Suisse cost of funds on a pass through basis from Wilaci to
Torchlight. In other words, the cost of the Credit Suisse loan was accounted for by
the parties when they agreed their contractual terms.92
92
In his email of 24 August 2012 to Mr Jeston, Mr Grill stated that he was “expecting to recover
all of my costs of going into the transaction which include legal, financial advice etc, loan set up
costs (if any), interest cost on the $37 million (at approx 5.25 %) plus $5m providing loan is
settled in 60 days…” (emphasis added). This confirms his understanding that the cost of funds
was included in total recoveries.
[197] I doubt whether such a claim could in any event succeed. Every trading
bank, to the knowledge of most borrowers, funds its lending from its own
borrowings. I am unaware of any authority which would entitle a bank, in the event
of default, to claim not only the interest rate stipulated in its loan documentation but
its cost of funds.
Claim for receivers’ costs and disbursements
[198] Wilaci seeks judgment for the costs incurred by its appointed receivers,
McGrath Nicol and their Solicitors Minter Ellison Rudd Watts. It relies on cl 7 of
the Loan Agreement in which Torchlight agreed to indemnify Wilaci for all costs,
losses, expenses and liabilities sustained or incurred by Wilaci as a result of a default
on the loan by Torchlight. The clause is in the following terms:
7
Indemnities
7.1
The borrower will on demand indemnify and hold the Lender
harmless against each cost, loss (including loss of profit or margin), expense
(including all legal expenses on a solicitor and own client basis and taxes)
and liability sustained or incurred by the Lender as a result of:
(a)
the occurrence or continuation of an Event of Default, or a
Relevant Party not complying with any obligation expressed
to be assumed by it in a Relevant Document; or
(b)
an amount payable by the Borrower to the Lender under a
Relevant Document,
(i)
not being paid when due, whether by prepayment,
acceleration or otherwise (but, so far as appropriate,
credit is to be given for amounts, if any, of default
interest paid under the Relevant Document) or,
(ii)
being paid or becoming payable otherwise than on a
Payment Date (whether or not that payment is
permitted or required under this Agreement); or
(c)
any repayment of the loan being made or becoming due
except as expressly permitted by clauses 3.1 and 3.8 (even if
the prepayment is required under this Agreement); or
(d)
the Facility not being drawn on the date requested,
by payment to the Lender of the amount the Lender certifies is
required to indemnify it for that cost, loss, expense or other liability,
including each cost and lost incurred in liquidating or re-employing
deposits or other funds acquired or arranged to fund or maintain the
Loan or any part of it.
7.2
The above indemnities are unconditional and irrevocable, are to
survive termination of the Facility and payment of all other indebtedness due
under any Relevant Document and are not to be discharged or impaired by
an act, omission, matter or thing that might discharge or impair them but for
this sub-clause.
[199] Relevant also is cl 11, particularly cl 11.2, in terms:
11.2
The Borrower will pay each cost and expense (including all legal
expenses on a solicitor and own client basis and taxes) sustained or
incurred by the Lender as a result of the exercise of, or in protecting
or enforcing or otherwise in connection with, its rights under any
Relevant Document or another transaction required or contemplated
by any Relevant Document, in each case on demand and on a full
indemnity basis.
[200] “Relevant Documents”, is defined in cl 1.1 to mean “this Agreement, the
Securities and each other agreement, present or future, required or contemplated by
or relating to this Agreement or the Securities.”
[201] The submissions of the parties in relation to whether receivers’ costs
(including legal disbursements) should be awarded were brief. Torchlight does not
dispute that receivers’ costs constitute costs, losses, expenses and or liabilities for the
purposes of cl 7. However it makes two alternative submissions, namely that:
(i)
the Court should assess receivers’ costs in accordance with the
principles of indemnity costs set out by the Court of Appeal in Black v
ASB Ltd,93 and that, pursuant to those principles, there is currently
insufficient information before the Court to determine this issue.
(ii)
the question of receivers’ costs should be dealt with separately after
the substantive judgment has been delivered, or alternatively, in
proceedings relating to the Cayman Islands fund brought by the
receivers and scheduled to be heard in 2016.
[202]
Wilaci submits that the jurisdiction to review solicitor/client costs does not
extend to receivers’ costs or their legal disbursements. It submits that the receivers’
costs are payable to it under the indemnity clause in the Loan Agreement and, as it is
93
Black v ASB Ltd [2012] NZCA 384.
not a party to the related proceedings, it is inappropriate to defer consideration of the
issue in the manner suggested by Torchlight.
[203] I note that the parties have agreed that New Zealand law should apply to
questions relating the construction of contracts. This leaves the following questions
for determination:
(i)
Whether cls 7 and 11 include receivers’ costs;
(ii)
If so, does this Court have jurisdiction to review these costs?
[204] I address these questions in turn.
Do clauses 7 and 11 include receivers’ costs?
[205] In my view, a plain and ordinary reading of cls 7 and 11.2 includes the
receivers’ costs that are now sought by Wilaci. There is no dispute that the event of
default occurred. Wilaci appointed receivers to protect its position as a creditor – in
other words, Wilaci incurred the receivers’ costs as a result of Torchlight’s failure to
comply with the obligations it assumed under the agreement.
[206] Accordingly, I find that cls 7 and 11.2 were triggered by the default on the
Loan Agreement, and that Wilaci may rely on these clauses to claim a full indemnity
for receivers’ costs for which it is currently liable.
Does the Court have jurisdiction to review receivers’ costs?
[207] Here I address Torchlight’s submission that the Court should review the
receivers’ costs in accordance with the principles governing indemnity costs. For the
reasons explained below, I do not consider that the Court has jurisdiction to conduct
such a review.
[208] First, there is no general right of review or adjustment under the Loan
Agreement.
Clause 7.2 makes the agreed indemnities “unconditional and
irrevocable” and provides that they are not to be discharged or impaired by any
thing. The jurisdiction to review receivers’ costs can therefore only be based in
statute or in the High Court Rules.
[209] Rule 14.6 of the High Court Rules governs indemnity costs. Pursuant to
r 14.6(1)(b), indemnity costs are the actual costs and disbursements reasonably
incurred by a party. In Black v ASB Bank Ltd the Court of Appeal said the following
in respect of the requirement that indemnity costs be “reasonable”:94
It follows from the wording of r 14.6(1)(b) that indemnity costs are
determined with reference to actual costs, but may be less than the actual
costs if the Court considers the actual costs were not reasonably incurred.
[210] The Court then went on to analyse the proper approach to indemnity costs
where solicitor/client costs are agreed to under a contract. The Court concluded that
it should make an objective assessment of:95
(a)
what tasks attract a costs indemnity on a proper construction of the
contract;
(b)
whether the tasks undertaken were those contemplated in the
contract;
(c)
whether the steps undertaken were reasonably necessary in
pursuance of those tasks;
(d)
whether the rate at which the steps were charged was reasonable
having regard to the principles normally applicable to solicitor/client
costs; and
(e)
whether any other principles drawn from the general law of contract
would in whole or in part deny the claimant its prima facie right to
judgment.
[211] Importantly, the reasonableness analysis is only applicable to costs to which
pt 14 of the High Court Rules applies.
Rule 14.1 provides that the Court has
complete discretion in all matters relating to the costs of a proceeding, incidental to a
proceeding, or of a step in the proceeding. As discussed above, receivers’ costs in
this case were incurred to better secure Wilaci’s position as a creditor. They were not
(or were not in any material sense) related to its counterclaim against Torchlight. It
follows that receivers’ costs are not part of the costs regime and accordingly, neither
pt 14 of the Rules nor the 14.6(1)(b) requirement of reasonableness applies. For
94
95
At [77].
At [80].
these reasons, I do not consider there to be any jurisdiction to review receivers’ costs
under the High Court Rules.
[212] The only remaining avenue through which the Court has jurisdiction to
review receivers’ costs is an application made under s 34 of the Receiverships Act
1993, which provides:
34
Court supervision of receivers
(1)
The court may, on the application of a receiver,—
(a)
give directions in relation to any matter arising in connection
with the performance of the functions of the receiver:
(b)
revoke or vary any such directions.
(2)
The court may, on the application of a person referred to in
subsection (3),—
(a)
in respect of any period, review or fix the remuneration of a
receiver at a level which is reasonable in the circumstances:
(b)
to the extent that an amount retained by a receiver as
remuneration is found by the court to be unreasonable in the
circumstances, order the receiver to refund the amount:
(c)
declare whether or not a receiver was validly appointed in
respect of any property or validly entered into possession or
assumed control of any property.
(3)
Any of the following persons may apply to the court under
subsection (2):
(4)
(a)
the receiver:
(b)
the grantor:
(c)
a creditor of the grantor:
(d)
a person claiming, through the grantor, an interest in the
property in receivership:
(e)
the board of directors of the grantor or, in the case of a
grantor that is in liquidation, the board of the grantor at the
time the liquidator was appointed:
(f)
if the grantor is a company, a liquidator:
(g)
if the grantor is a person who has been adjudged bankrupt,
the Official Assignee of the estate of the grantor.
The powers given by subsections (1) and (2)—
(a)
are in addition to any other powers the court may exercise
under this Act, any other Act, or in its inherent jurisdiction;
and
(b)
may be exercised in relation to a matter occurring either
before or after the commencement of this Act and whether or
not the receiver has ceased to act as receiver when the
application is made.
…
[213] “Grantor” is defined in s 2 of the Act as “the person in respect of whose
property a receiver is, or may be, appointed”. “Creditor” includes “a person to
whom the grantor owes a debt or is under a liability, whether present or future,
certain or contingent, and whether an ascertained debt or a liability in damages”.
[214] In Eagle v Petterson the defendant raised concerns about the allegedly
inefficient way in which the receivers had obtained the company’s records.96 There
was no cross-examination of the witnesses and very little evidence presented on the
matter. Justice Heath proceeded on the basis that the receivers’ evidence was
accurate and their costs reasonable. His Honour concluded that if there were any
questions about the amount of remuneration claimed by the receivers, it could be
resolved by an application under s 34(2)(a), and if as a result of that review the Court
considered that the amount paid to the receivers exceeded a reasonable amount, the
Court could order the receivers to refund the difference under s 34(2)(b).
[215] In the present case there is no application before the Court to review
receivers’ costs under s 34(2)(a). Nor is there any evidence to suggest the costs
claimed by the receivers are unreasonable having regard to the clearly extensive
work undertaken by them in obtaining Torchlight’s records and endeavouring to take
control of the assets in receivership. I intend therefore to award receivers’ costs now
leaving open the possibility of a future application under s 34 and any associated
refund.
[216] Without prejudging any such application, it seems to me that my finding in
relation to the Late Payment fee does not of itself call into question the
96
Eagle v Petterson HC Auckland CIV-2011-404-7387.
appropriateness of the receivers’ appointment or the steps taken by them given that,
independently of that fee, there was clearly a substantial amount owing in terms of
interest and facility fees at the time the appointment was made. Moreover, it seems
to me that Torchlight could have significantly reduced receivers’ costs by reasonable
co-operation with requests for information and/or acknowledgement of Wilaci’s
security over the assets indentified in the related proceedings, to the extent upheld in
this claim.
[217] I make one final observation. Section 34 only gives the Court jurisdiction to
review receivers’ remuneration. It does not extend to disbursements. As was stated
by Hoffmann J in Re Potters Oils Ltd (No 2), dealing with an analogous UK
provision, disbursements remain the subject of the law of agency,97 and are
potentially open to challenge in that context. In the present case, no such challenge
has been made.
Nor, as I have indicated, is there any evidence on which an
assessment could proceed.
[218] As a result, I order Torchlight to pay Wilaci the costs and disbursements of
the receivers.
Relief
[219] On the plaintiff’s claim I:
(i)
make a declaration that the Late Payment fee was a penalty and is
therefore unenforceable.
(ii)
order, pursuant to s 35(1)(a) of the Recieverships Act that, on payment
of all amounts specified or declared payable pursuant to [220] and
[221] of this judgment, and any such other sums as may be payable
under the GSA, the first defendants must cease to act as receivers of
the plaintiff and that the second defendant be prohibited from
appointing any other receiver in respect of the property in
receivership.
97
Re Potters Oils Ltd (No2) [1986] 1 WLR 201 at 207, [1986] 1 All ER 890 at 895.
[220] On the counterclaim, I give judgment against the plaintiff and the
counterclaim defendant for the following sums:
(i)
The sum of AUD 5m being the fee described as payable in
Schedule 1 cl (v)(a) of the Loan Agreement.
(ii)
Interest on all outstanding sums in accordance with cl 3.5 of
the Loan Agreement.
(iii)
Receivers’ costs and disbursements in the amount of
$1,182,351.70 in accordance with the summary contained in
paragraph 31 of the brief of evidence of Kare Johnstone.
[221] I make further orders:
(i)
Declaring that the second defendant is, on the counterclaim, entitled
to such additional receivers’ costs as have been incurred since 31 July
2015; and
(ii)
Reserving leave to all parties to refer any differences in calculation to
the Court for its final determination (my expectation being that the
parties’ financial advisors can attend to quantification without further
assistance from the Court).
Costs
[222] Wilaci seeks indemnity costs pursuant to the Loan Agreement. It is accepted
that the jurisdiction to award such costs is subject to an assessment of reasonableness
pursuant to r 14.6(1)(b).
[223] The parties are, in that context, agreed that the assessment of costs be
deferred. Any such assessment (both in terms of proper incidence and quantum)
will, in my view, need to take into account (in what is not intended to be an
exhaustive list):
(i)
Torchlight’s success on the Late Payment fee issue.
(ii)
Torchlight’s late concession in respect of the fee provided for in
Schedule 1(v)(a) of the Loan Agreement.
(iii)
Torchlight’s liability for interest in terms of Schedule 1 cl (v)(b) and
under cl 3.5 of the Loan Agreement.
(iv)
Wilaci’s successful claim for receivers’ costs and disbursements.
(v)
The reasonableness assessment implicit in r 14.6(1)(b).
[224] In the event the parties are unable to settle costs, a telephone conference can
be requested, timetable orders made for submissions and a hearing (if necessary)
scheduled.
__________________________
Muir J